Machine replacement decisionA company is considering replacing an old piece of machinery, whichcost $400,000 and has $175,000 of accumulated depreciation to date, witha new machine that has a purchase price of $550,000. The old machinecould be sold for $250,000. The annual variable production costsassociated with the old machine are estimated to be $72,500 per year foreight years. The annual variable production costs for the new machineare estimated to be $24,000 per year for eight years.a. Prepare a differential analysis dated May 29 to determinewhether to continue with (Alternative 1) or replace (Alternative 2)the old machine.b. What is the sunk cost in this situation?
Machine replacement decision
A company is considering replacing an old piece of machinery, which
cost $400,000 and has $175,000 of
a new machine that has a purchase price of $550,000. The old machine
could be sold for $250,000. The annual variable production costs
associated with the old machine are estimated to be $72,500 per year for
eight years. The annual variable production costs for the new machine
are estimated to be $24,000 per year for eight years.
a. Prepare a differential analysis dated May 29 to determine
whether to continue with (Alternative 1) or replace (Alternative 2)
the old machine.
b. What is the sunk cost in this situation?
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