Replace Equipment A machine with a book value of $246,200 has an estimated six-y

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Replace Equipment

A machine with a book value of $246,200 has an estimated six-year life. A proposal is offered to sell the old machine for $217,100 and replace it with a new machine at a cost of $280,100. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $50,400 to $40,300.

Prepare a differential analysis dated February 18, on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). If an amount is zero, enter zero "0". Use a minus sign to indicate a loss.

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) February 18 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

Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) 18-Feb 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 217100 217100 Costs: Purchase price 0 -280100 -280100 Direct labor (6 years) -302400 -241800 60600 Income (Loss) -302400 -304800 -2400 The company should continue with the old machine

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