Consider the following two options related to one of the old but special machine tools in your

Question:

Consider the following two options related to one of the old but special machine tools in your machine shop.
• Option 1: You continue to use the old machine tool that was bought four years ago for $ 12,000. It has been fully depreciated but can be sold for $2,000. If kept, it could be used for three more years with proper maintenance and with some extra care. No is expected at the end of three years. The maintenance costs would run $10,000 per year for the old machine tool.
• Option 2: You purchase a brand-new machine tool at a price of $15,000 to replace the present equipment. Because of the nature of the product manufactured, it also has an expected economic life of three years and will have a of $5,000 at the end of that time. With the new machine tool, the expected operating and main¬tenance costs (with the scrap savings) amount to $3,000 each year for three years.
(a) For the old machine tools, what would be the amount of sunk cost that should be recognized in replacement analysis?
(b) What is the of retaining the old machine tool now?
(c) What is the net incremental benefit (or loss) in present value associated with replacing the old machine tool at an interest rate of 15%?
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...