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Unformatted text preview: One other point about Jeffcoat's decision: The book value of the old machine does not affect the decision. Book value is a sunk cost , which is a cost that cannot be changed by any present or future decision. Sunk costs are not relevant in incremental analysis . In this example, if the company retains the asset, book value is depreciated over its remaining useful life. Or, if the company acquires the new unit, book value is recognized as a loss of the current period. Thus, the effect of book value on current and future earnings is the same regardless of the replacement decision. However, any trade-in allowance or cash disposal value of the existing asset is relevant to the decision, because the company will not realize this value if the old asset is continued in use....
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- Fall '11
- Depreciation, Generally Accepted Accounting Principles, sunk costs