Question

Please explain.

Replace Equipment

A machine with a book value of $248,900 has an estimated six-year life. A proposal is offered to sell the old machine for $214,300 and replace it with a new machine at a cost of $282,800. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $49,300 to $39,400.

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.

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)	$	$	$

Answer 1

	Differential Analysis
	Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
	Feb-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	0.00	214300	214300
	Costs:
	Purchase price	0.00	282800	-282800
	Direct labor (6 years)	295800	236400	59400
	Income (Loss)	-295800	-304900	-9100
	Company Should continue with Old Machine Since Differential Effect on Income is Negative with 9100/-