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

Question

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

Quizplus · Accepted Answer

The original cost of the old machine is sunk cost and has no bearing on the replacement decision. The relevant factors are the price of the new machine, the current disposal value of the old machine, and the annual operating costs.

Smith Industries Is Considering Replacing a Machine That Is Presently