A company is considering replacing an old piece of machinery, which cost $500,000 ,000 of accumulated depreciation to date, with a new machine that costs $450,000. The old equipment could be sold for $120,000. The variable production costs associated with the old machine are estimated to be $150,000 for six years. The variable production costs for the new machine are estimated to be $90,000 for six years.
Required:
a- Determine the differential annual income or loss from replacing the old machine.
b- What is the sunk cost in this situation?
c- Based on the data presented, should the company replace the old equipment?
d- What are some of the other factors that should be considered before a final decision is made?