Answer:
The current machine should be replaced as doing that brings $6000 in benefits as shown below.
Explanation:
In order to determine which of the two options between replacing the old machine and acquiring new machine is more viable it would be appropriate to carry out an incremental cost/benefits analysis of both options:
Old machine New machine Difference
A B A-B
Operating annual costs $125,000* $100,000** $25,000
New machine costs $0 $25,000 -$25,000
salvage value ($,6000) $6000
Total costs $125,000 $119,000 $6,000
*The old machine has $125,000 ($25,000*5) estimated operating costs for five years.
**The new machine has $$100,000($20,000*5) estimated operating costs for five years
The cost of price of the old asset is not relevant as it is a sunk cost.
