An oven with a book value of $67,000 has an estimated 5 year life. A proposal is
ID: 2504944 • Letter: A
Question
An oven with a book value of $67,000 has an estimated 5 year life. A proposal is offered to sell the oven for $8,500 and replace it with a new oven costing $110,000. The new machine has a five year life with no residual value. The new machine would reduce annual maintenance costs by $23,000. Provide a differential analysis on the proposal to replace the machine. Annual maintenance cost reduction Number of years applicable Total differential decrease in cost Proceeds from sale of equipment Cost of new equipment Net differential decrease in cost from replacing equipmentExplanation / Answer
Annual cost reduction=$23000
Number of years applicable=5 years
Total cost saving=$115000
Proceeds from old machine=$8500
Total benefit=$123500
Cost of new equipment=$110000
Net differencial Decrease in cost=$13500