Question

A company is considering replacing an old piece of machinery, which cost $602,600 and has $351,900 of accumulated depreciation to date, with a new machine that has a purchase price of $486,400. The old machine could be sold for $64,900. The annual variable production costs associated with the old machine are estimated to be $159,000 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,700 per year for eight years. a.1 Prepare a differential analysis dated May 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss

Answer 1

	Continue with old machine	Replace old machine	Differential effect on income
	(Alternative 1)	(Alternative 2)	(Alternative 2)
Revenues
Proceeds from sale of old machine	0	64900	64900
Costs
Purchase price	0	-486400	-486400
Variable production costs (8 years)	-1272000	-813600	458400
Income (loss)	-1272000	-1235100	36900
Replace the old machine
Workings:
	(Alternative 1)	(Alternative 2)
Variable production costs (8 years)	=159000*8	=101700*8