Replace machine: Frederick, Inc. is considering replacing a machine. The followi
ID: 2476138 • Letter: R
Question
Replace machine:
Frederick, Inc. is considering replacing a machine. The following data are available:
Replacement
Old Machine Machine
Original cost $45,000 $35,000
Useful life in years 10 5
Current age in years 5 0
Book value $25,000
Disposal value now $8,000
Disposal value in 5 years 0 0
Annual cash operating costs $7,000 $4,000
Required:
a. Which of the data provided in the table is a sunk cost?
b. The difference between keeping the old machine and replacing the old machine is:
Explanation / Answer
A.
sunk cost is the original cost of the old machine = $45,000
B.
New [$35,000 + (5 x $4,000)] – Old [$8,000 + (5 x $7,000)] = $12,000 in favour of keeping the old machine