Question

Delaney company is considering replacing equipment which originally cost $600,000 and which has $420,000 accumulated depreciation to date. a new machine will cost $790,000 and the old equipment can be sold for $8,000. what is the sunk cost in this situation?

Answer 1

In this case, we have to deduct the original equipment cost with the accumulated depreciation to date.
$600,000 - $420,00 = $180,000

Purchasing a new machine would cost $790,000, which can be deducted with the remaining value of the old machine plus its value once sold. To do this, we have:
$790,000 - $180,000 - $8,000 = $602,000

The sunk cost in this case is $602,000.