A company is considering replacing an old piece of machinery, which cost $600,00

Question

A company is considering replacing an old piece of machinery, which cost $600,000 and has $350,000 of accumulated depreciation to date, with a new machine that costs $450,000. The old equipment could be sold for $72,000. The annual variable production costs associated with the old machine are estimated to be $165,000 for eight years. The annual variable production costs for the new machine are estimated to be $112,750 for eight years.

a. Determine the total and annualized differential income or loss anticipated from replacing the old machine.
$

b. What is the sunk cost in this situation?
$

Explanation / Answer

A) Book value of old machine: 250,000 -Sale Value: 72,000 =Loss from sale old machine: 158,800 Loss from sale: 158,800 +Cost of new machine 450,000 =Total Cost of replacing machine $608,800 Year 1 $608,800 Savings due to variable production costs $ 62,800 Savings(Loss) in year 1 ($608,800) Savings in year 2 $62,800 Savings in year 3 $62,800 Savings in year 4 $62,800 Savings in year 5 $62,800 Savings in year 6 $62,800 Total loss $294,800 B) $600,000 (the cost of the original machine, which has already occurred and will have no effect on the decision).

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