Machine Replacement DecisionA company is considering replacing an old piece of machinery, which cost $598,000 and has $351,800 of accumulated depreciation to date, with a new machine that has a purchaseprice of $486,800. The old machine could be sold for $64,000. The annual variable production costs associated with the old machine are estimated to be $158,600 per year for eightyears. The annual variable production costs for the new machine are estimated to be $98,700 per year for eight years.a. Prepare a differential analysis dated April 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "0". Forthose boxes in which you must enter subtracted or negative numbers use a minus sign.Differential AnalysisContinue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)April 29Continuewith OldMachineReplaceOldMachineDifferentialEffecton Income(Alternative 1) (Alternative 2) (Alternative 2)Revenues:QQProceeds from sale of old machineCosts:Purchase priceVariable productions costs (8 years)Income (Loss) b. What is the sunk cost in this situation?The sunk cost is $

Required (a)Differential AnalysisContinue with Old Machine (Alt. 1) or Replace Old Machine (Alt.…

Answered: Machine Replacement Decision A company…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section14.A: Breakeven Analysis

Problem 8P

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Although the Chen Company’s milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $110,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It would have zero salvage value at the end of its life. The project cost of capital is 10%, and its marginal tax rate is 25%. Should Chen buy the new machine?
Machine replacement decisionA company is considering replacing an old piece of machinery, whichcost $400,000 and has $175,000 of accumulated depreciation to date, witha new machine that has a purchase price of $550,000. The old machinecould be sold for $250,000. The annual variable production costsassociated with the old machine are estimated to be $72,500 per year foreight years. The annual variable production costs for the new machineare estimated to be $24,000 per year for eight years.a. Prepare a differential analysis dated May 29 to determinewhether to continue with (Alternative 1) or replace (Alternative 2)the old machine.b. What is the sunk cost in this situation?
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