A commercial oven with a book value of 67000 has an estimate

A commercial oven with a book value of $67,000 has an estimated remaining 5 year life. A proposal is offered to sell the oven for $8,500 and replace it with a new oven costing $110,000. The new machine has a 5-year life with no residual value. The new machine would reduce annual maintenance costs by $23,000. REQUIRED Provide a differential analysis on the proposal to replace the commercial oven.

Solution

Annual maintenance cost reduction $23,000 Number of years applicable × 5 Total differential decrease in cost $115,000 Proceeds from sale of equipment $8,500 $123,500 Cost of new equipment $110,000 Net differential decrease in cost from replacing equipment $13,500