C is corrent. When a company is considering exchanging an old asset for a new asset, the only factors that are economically relevant to the decision are those that differ between the two alternatives. When income tax considerations are ignored, the original cost of the old asset is irrelevant because the amount is unavoidable. It is a sunk cost. Sunk costs are irrelevant because they are the result of the past decision and, thus, will not affect the decision at hand. Fair market value of the old asset is relevant because, if the company decides to exchange the old asset, its fair market value could represent a reduction of the investment or cash outlay to acquire the new asset.
A is incorrect because the fair market value of the old asset is relevant.
B is incorrect because the original cost of the old asset is irrelevant.
D is incorrect because the original cost of the old machine is irrelevant and its fair market value is relevant.
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