Consider the following two options related to one of the old but special machine tools in your machine shop.
• Option 1: You continue to use the old machine tool that was bought three years ago for $9,000. It has been fully depreciated but can be sold for $2,500. If kept, it
could be used for three more years with proper maintenance and with some extra care. No salvage value is expected at the end of three years. The maintenance
costs would run $8,000 per year for the old machine tool.
• Option 2: You purchase a brand-new machine tool at a price of $13,000 to replace the present equipment. Because of the nature of the product manufactured, it
also has an expected economic life of three years and will have a salvage value of $3,000 at the end of that time. With the new machine tool, the expected operating
and maintenance costs (with the scrap savings) amount to $3,000 each year for three years.
Click the icon to view the interest factors for discrete compounding when i = 13% per year.
(a) For the old machine tools, what would be the amount of sunk cost that should be recognized in replacement analysis?
The amount of sunk cost is $ 6500. (Round to the nearest dollar.)
(b) What is the opportunity cost of retaining the old machine tool now?
The opportunity cost of retaining the old machine tool is $ 2500. (Round to the nearest dollar.)
(c) What is the net incremental benefit (or loss) in present value associated with replacing the old machine tool at an interest rate of 13%?
The net incremental benefit (or loss) in present value associated with replacing the old machine tool is $ (Round to the nearest dollar.)
