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:
$\begin{array}{lr}\text { Current machinery. }\\\text { Original cost } & \$ 5,000 \\ \text { Acccumulate d depreciation } & 40,000 \\\text { Anmul operating costs } & 5,000 \\ \text { Current market value } & 1,500\\\text { Salvage value at the end of five years }&-\\\text { Cost of ove thauling machinery. }\\\text { Cost of overhaul }&\$12,000\\\text { Anrmal operating costs after overhauling }&2,000\\\text { Salvage value at the end of five years }&-\\\text { New machinery. }\\\text { Cost }&\$56,000\\\text { Anmul operating costs }&1,000\\\text { Salvage value at the end of five years }&-\end{array}$ 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 ...

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