Replace Equipment A machine with a book value of 245200 has

Replace Equipment A machine with a book value of $245,200 has an estimated six-year life. A proposal is offered to sell the old machine for $217,800 and replace it with a new machine at a cost of $281,700. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $49,400 to $39,500. 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)? Replace the old machine Next

Solution

Differential Analysis Continue with Replace with Differential Effct Old Machine New machine on income Revenue: Proceeds from old machine 217800 217800 Cost: Purchase cost 281700 -281700 Direct labor (6 years) 296400 237000 59400 Income (loss) -296400 -300900 -4500 Should continue with Old machine