Question

A commercial oven with a book value of $50,910 has an estimated remaining 5 year life....

A commercial oven with a book value of $50,910 has an estimated remaining 5 year life. A proposal is offered to sell the oven for $15,910 and replace it with a new oven costing $90,910. The new machine has a 5-year life with no residual value. The new machine would reduce annual maintenance costs by $17,480.

Provide a differential analysis on the proposal to replace the commercial oven.

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Answer #1
Ans:-
Differential analysis on the proposal
Incremental cost from replacement of A commercial oven
Particular Amount
Cost of new oven           90,910
Less:- Sale of old oven         (15,910)
Less:- Reduction of annual maintenance cost         (87,400)
(17480X 5)
Total         (12,400)
There is incremental savings of 12400 from replcement of a commerial oven.
Replacement of oven is better decision.
Note:- Present value factor is not considered as discounting rates are not given.
Also there is impact of tax however it is not considered as tax rate is not given.
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