Machine Replacement Decision A company is considering replacing an old piece of

Question

Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $4,388,000 and has $2,573,000 of accumulated depreciation to date, with a new machine that costs $3,299,200. The old equipment could be sold for $520,800. The annual variable production costs associated with the old machine are estimated to be $1,236,100 for eight years. The annual variable production costs for the new machine are estimated to be $852,900 for eight years. a. Determine the total and annualized differential income or loss anticipated from replacing the old machine Net differential income Annual differential income b. What is the sunk cost in this situation? , the book value of the present equipment.

Explanation / Answer

Annual increment in variable cost due to purchase of new machine = 1236000-852900

= $383200

Salvage value earned from sale = $520800

Net Benefit = 520800-383200

=$137600

Sunk cost is book value of old machine= 4388000-2573000

=$1815000

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