Question

Instructions

Lexigraphic Printing Company is considering replacing a machine that has been used in its factory for four years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows:

Old Machine
Cost of machine, 10-year life	$88,820
Annual depreciation (straight-line)	9,050
Annual manufacturing costs, excluding depreciation	23,470
Annual non-manufacturing operating expenses	6,020
Annual revenue	74,030
Current estimated selling price of machine	29,610

New Machine
Purchase price of machine, six-year life	$119,515
Annual depreciation (straight-line)	20,040
Estimated annual manufacturing costs, excluding depreciation	6,805

Annual non-manufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.

	Required:
1.	Prepare a differential analysis as of April 30 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the total differential income that would result over the six-year period if the new machine is acquired. 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.	List other factors that should be considered before a final decision is reached.

Answer 1

	Old Machine	New Machine	Difference
Annual Revenue	$74,030	$74,030	$0
-Annual Manufacturing Costs	$23,470	$6,805	$16,665
-Depreciation	$9,050	$20,040	-$10,990
-Annual non-manufacturing operating expenses	$6,020	$6,020	$0
Net Income	$35,490	$41,165	$5,675
Differential net Income for 6 years	$34,050	=5675*6
+Depreciation difference	$65,940	=10990*6
+Current estimated selling price of old machine	$29,610
-Purchase price of new machine	-$1,19,515
Net Differential Cashflow	$10,085

Other factors that should be considered before a final decision is reached:

• Quality of production from new machine.
• Tax effect of replacing machine.
• Residual Value of new machine
• Ease of usability of new machine.