Tommy has been using the same machines to make its name brand clothing for the last five years. A cost efficiency consultant has suggested that production costs may be reduced by purchasing more technologically advanced machinery. The old machines cost the company $120,000. The old machines presently have a book value of $80,000 and a market value of $6,000. They are expected to have a five-year remaining life and $1,000 salvage value. The new machines would cost the company $60,000 and have operating expenses of $9,000 a year. The new machines are expected to have a five-year useful life and $5,000 salvage value. The operating expenses associated with the old machines are $15,000 a year.

Should Tommy keep or replace the machine, and how would that decision impact profitability?

13. On question #12, indicate the following:

a. sunk cost:

b. relevant cost:

c. Opportunity cost: