Chavez Company Is Considering Purchasing New Equipment or Overhauling Its

Chavez Company is considering purchasing new equipment or overhauling its existing equipment.The manager has gathered the following information:
$\begin{array}{lr} \text { Current machinery: } &\\ \text { Original cost } &\$50,000\\ \text { Accumulated depreciation} &40,000\\ \text { Annual operating costs } &5,000\\ \text { Current market value } &1,500\\ \text { Salvage value at the end of five year's } &-\\ \text { Cost of overhauling machinery: } &\\ \text { Cost of overhaul } &\$12,000\\ \text { Anual operating costs after overhauling } &2,000\\ \text { Salvage value at the end of five years } &-\\ \text { New machinerv:} &\\\text { Cost } & \$ 56,00 \\\text { Annual operating costs } & 1,000 \\\text { Salvage value at the end of five years } &-\end{array}$ Required:
1)Identify the sunk costs associated with this decision.
2)Compute the increase or decrease in total income over the five-year period if the company chooses to buy the new equipment.
3)Compute the increase or decrease in total income over the five-year period if the company chooses to overhaul its existing machinery.
4)What is your recommendation for this decision?

Correct Answer:

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1)Sunk costs include the original cost a...

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