Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available:
$$\begin{array} { | l | l | l | }
\hline & \text { Old Machine } & \begin{array} { l }
\text { Replacement } \
\text { Machine }
\end{array} \
\hline \text { Original cost } & \$ 45,000 & \$ 35,000 \
\hline \text { Remaining useful life in years } & 5 & 5 \
\hline \text { Current age in years } & 5 & 0 \
\hline \text { Book value } & \$ 25,000 & \
\hline \text { Current disposal value in cash } & \$ 8,000 & \
\hline \text { Future disposal value in cash (in 5 years) } & \$ 0 & \$ 0 \
\hline \text { Annual cash operating costs } & \$ 7,000 & \$ 4,000 \
\hline
\end{array}$$ For a machine replacement decision which of the information provided in the table is a sunk cost?

Question

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available:
$$\begin{array} { | l | l | l | } 
\hline & \text { Old Machine } & \begin{array} { l } 
\text { Replacement } \
\text { Machine }
\end{array} \
\hline \text { Original cost } & \$ 45,000 & \$ 35,000 \
\hline \text { Remaining useful life in years } & 5 & 5 \
\hline \text { Current age in years } & 5 & 0 \
\hline \text { Book value } & \$ 25,000 & \
\hline \text { Current disposal value in cash } & \$ 8,000 & \
\hline \text { Future disposal value in cash (in 5 years) } & \$ 0 & \$ 0 \
\hline \text { Annual cash operating costs } & \$ 7,000 & \$ 4,000 \
\hline
\end{array}$$ For a machine replacement decision which of the information provided in the table is a sunk cost?

Quizplus · Accepted Answer

The original cost of the old machine is a sunk cost because it is a past cost that cannot be recovered or changed by the decision to replace the machine.

Smith Industries Is Considering Replacing a Machine That Is Presently