Question - Certain production equipment used by Dayton Mechanical has become obsolete relative to current technology. The company is considering whether it should keep or replace it's existing equipment. To aid in this decision, the company's controller gathered the following data:
Old equipment new Equipment
Original cost 350,000 396,000
Remaining life 5 years 5 years
Accumulate depreciation 158,000 0
Annual cash operating costs 64,000 16,000
Current salvage value 88,000 NA
Salvage value in 5 years 0 0
a. Identify any sunk costs in the data
b. Identify any irrelevant future costs
c. Identify all relevant costs to the equipment replacement decision
d. What are the opportunity costs associated with the alternative of keeping the old equipment?
e. What is the incremental cost to replace the old equipment?
f. What qualitative considerations should be considered before making any decision?