Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $599,000 and has $350,900 of accumulated depreciation to date, with a new machine that has a purchase price of $484,300. The old machine could be sold for $63,900. The annual variable production costs associated with the old machine are estimated to be $156,400 per year for eight years. The annual variable production costs for the new machine are estimated to be $100,100 per year for eight years.

a.1 How would you make a differential analysis dated September 13, to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.

	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues:
Proceeds from sale of old machine
Costs:
Purchase price
Variable productions costs (8 years)
Income (Loss)

a.2 how would you determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.

b. What is the sunk cost in this situation?