Question

A machine with a book value of $122,940 has an estimated six-year life. A proposal is offered to sell the old machine for $88,330 and replace it with a new machine at a cost of $132,380. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $54,050 to $44,590.

	Required:
1.	Prepare a differential analysis dated February 18 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
2.	Should the company continue with the old machine (Alternative 1) or replace the old machine (Alternative 2)?

Answer 1

	Continue with Old Machine	Replace Old Machine	Differential Effect on Income
Revenues:
Proceeds from sale of old machine	0	88330	88330
Costs:
Purchase price	0	-132380	-132380
Direct labor (8 years)	-324300	-267540	56760
Income (Loss)	-324300	-311590	12710
2
The company should replace the old machine.
Workings:
Direct labor (8 years):
Alternative 1=54050*8=324300
Alternative 2=44590*8=267540