Question

Replace Equipment

A machine with a book value of $251,800 has an estimated six-year life. A proposal is offered to sell the old machine for $215,600 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 $49,800 to $39,800.

a. Prepare a differential analysis dated April 11 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). If an amount is zero, enter "0". Use a minus sign to indicate subtracted or negative numbers or a loss.

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
April 11
	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)	$	$	$

b. Should the company continue with the old machine (Alternative 1) or replace the old machine (Alternative 2)?

Answer 1