3. Chavez Company is considering purchasing new equipment or overhauling its existing equipment. The manager has gathered the following information: Current machinery: Original cost $ 50,000 Accumulated depreciation 40,000 Annual operating costs 5,000 Current market value 1,500 Salvage value at the end of five years - Cost of overhauling machinery: Cost of overhaul $ 12,000 Annual operating costs after overhauling 2,000 Salvage value at the end of five years - New machinery: Cost $ 56,000 Annual operating costs 1,000 Salvage value at the end of five years -

Required:

a) Identify the sunk costs associated with this decision.

b) Compute the increase or decrease in total income over the five-year period if the company chooses to buy the new equipment.

c) Compute the increase or decrease in total income over the five-year period if the company chooses to overhaul its existing machinery. d) What is your recommendation for this decision