Question

A company is considering replacing an old machine which had an initial cost of $100,000 and has $75,000 of accumulated depreciation to date.The company is considering purchasing a new machine which costs $195,000.The old machine could be sold for $20,000.The annual variable production costs associated with the old machine are estimated to be $10,000 per year for five years.The annual variable production costs for the new machine are estimated to be $2,000 per year for five years.Should the company replace the old machine and what is the sunk cost in this situation?

A. Yes; sunk cost = $40,000
B. Yes; sunk cost = $20,000
C. Yes; sunk cost = $100,000
D. No; sunk cost = $25,000