McKinnon Company’s plant manager is considering buying a new machine to replace an old grinding machine or overhauling the old one to ensure compliance with the plant’s high-quality standards. The following data are available:
Old Grinding Machine
Original cost $50,000
Accumulated Depreciation 40,000
Annual operating costs 18,000
Current salvage value 4,000
Salvage value at end of 5 years 0
New Grinding Machine
Cost $70,000
Annual operating costs 13,000
Salvage value at end of 5 years 500
Overhaul of Old Grinding Machine
Cost of overhaul $25,000
Annual operating costs after
Overhaul 14,000
Salvage value at end of 5 years 200
a) What costs should the decision maker consider as sunk costs?
b) List all relevant costs and when they are incurred.
c) What should the plant manager do? Why?