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

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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:
$$\begin{array} { | l | r | r | } 
\hline& \text { Old Machine } &{ \begin{array} { c } 
\text { Replacement } \
\text { Machine }
\end{array} } \ 
\hline \text { Original cost } & \$ 45,000 & \$ 35,000 \
\hline \text { Remaining useful life in years } & 5 & 5 \
\hline \text { Current age in years } & 5 &0 \
\hline \text { Book value } & \$ 25,000 &  \
\hline \text { Current disposal value in cash } & \$ 8,000 &  \
\hline \text { Future disposal value in cash (in 5 years) } & \$0 & \$0\
\hline \text { Annual cash operating costs } & \$7,000&\$4,000 \
\hline
\end{array}$$

-
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 historical cost that cannot be recovered regardless of the decision to replace the machine. The current disposal value and current annual operating cost of the old machine are relevant costs that should be considered in the decision-making process. The price of the new machine is also a relevant cost as it represents the cost of the potential investment.

Smith Industries Is Considering Replacing a Machine That Is Presently