Replace Equipment A machine with a book value of $250,400 has an estimated six-y

Question

Replace Equipment

A machine with a book value of $250,400 has an estimated six-year life. A proposal is offered to sell the old machine for $216,700 and replace it with a new machine at a cost of $281,900. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $50,600 to $40,500.

a. Prepare a differential analysis dated April 11 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). If an amount is zero, enter "0". Use a minus sign to indicate subtracted or negative numbers or a loss.

b. Should the company 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) April 11 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) $ $ $

Explanation / Answer

a. Differential Analysis:

b. The company should continue with the old machine.

Continue with Old Machine ( Alternative 1 ) Replace Old Machine ( Alternative 2) Differential Effect on Income ( Alternative 2) Revenues Proceeds from Sale of Old Machine 0 - 33,700 - 33,700 Costs Purchase Price 0 - 281,900 - 281,900 Direct Labor 303,600 - 243,000 60,600 Income ( Loss) - 303,600 - 558,600 - 255,000

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