Certain production equipment used by Dayton Mechanical has become obsolete relative to current technology. The company is considering whether it should keep or replace its 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
- Accumulated depreciation $158,000 $0
- Annual cash operating costs $64,000 $16,000
- Current salvage value $88,000 NA
- Salvage value in five years $0 $0
a. Identify any sunk costs in the data.
b. Identify any irrelevant (nondifferential) 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 purchase the new equipment?
f. What qualitative considerations should be considered before making any decision?