Replace Equipment A machine with a book value of $245,000 has an estimated six-y

ID: 2418252 • Letter: R

Question

Replace Equipment

A machine with a book value of $245,000 has an estimated six-year life. A proposal is offered to sell the old machine for $216,200 and replace it with a new machine at a cost of $282,700. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $49,500 to $39,600.

Note: Consider an outflow a negative value; an inflow a positive value. If an amount is zero, enter "0".

Prepare a differential analysis dated February 18, 2014, on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2).

Differential Analysis

Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)

February 18, 2014

Continue with Old Machine (Alternative 1)

Replace Old Machine (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues:

Proceeds from sale of old machine

Costs:

Purchase price

Direct labor (6 years)

Income (Loss)

Should the company continue with the old machine (Alternative 1) or replace the old machine (Alternative 2)?

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