Ernie Company is considering replacing a machine that is presently used in the production of its product.The following data are available: $$\begin{array} { l r r }
& \text { Old Machine } & \begin{array} { r }
\text { Replacement } \
\text { Machine }
\end{array} \
\text { Original cost } & \$ 295,000 & \$ 188,000 \
\text { Useful life in years } & 11 & 5 \
\text { Current age in years } & 6 & 0 \
\text { Book value } & \$ 130,000 & - \
\text { Disposal value now } & \$ 52,000 & - \
\text { Disposal value in } 5 \text { years } & 0 & 0 \
\text { Annual cash operating costs } & \$ 39,000 & \$ 24,000
\end{array}$$ The _____ is irrelevant.
A)original cost of the replacement machine
B)disposal value of the old machine
C)book value of the old machine
D)annual operating cost of the old machine

Question

Ernie Company is considering replacing a machine that is presently used in the production of its product.The following data are available: $$\begin{array} { l r r } 
& \text { Old Machine } & \begin{array} { r } 
\text { Replacement } \
\text { Machine }
\end{array} \
\text { Original cost } & \$ 295,000 & \$ 188,000 \
\text { Useful life in years } & 11 & 5 \
\text { Current age in years } & 6 & 0 \
\text { Book value } & \$ 130,000 & - \
\text { Disposal value now } & \$ 52,000 & - \
\text { Disposal value in } 5 \text { years } & 0 & 0 \
\text { Annual cash operating costs } & \$ 39,000 & \$ 24,000
\end{array}$$ The _____ is irrelevant.
A)original cost of the replacement machine
B)disposal value of the old machine
C)book value of the old machine
D)annual operating cost of the old machine

Quizplus · Accepted Answer

The book value of the old machine is irrelevant because it is a sunk cost, which means it is a past cost that cannot be recovered or changed by any future action. Decision-making should focus on future costs and benefits, not on historical costs.

Ernie Company Is Considering Replacing a Machine That Is Presently