Question

Management is considering replacing its blending equipment. The annual costs of operating the old equipment are $250,000. The annual costs of operating the new equipment are expected to be $220,000. The old equipment has a book value of $35,000 and can be sold for $25,000. The cost of the new equipment would be $260,000. Which of these amounts should be considered a sunk cost in deciding whether to replace the old equipment

Answer 1

Answer:

$250,000

Explanation:

Since the purchase cost of an old equipment is already incurred and it does not have any kind of impact in decision making so this cost would be considered as the sunk cost i.e. $250,000

The operating cost of old & new equipment would be relevant for calculating the annual cost savings and the current selling value of the old equipment would also be relevant as salvage value

Therefore $250,000 would be considered