Practice Quiz - Differential Analysis Johnson Co. is considering replacing a machine that has been used for four years. Assume neither the new or old machine has a residual value. Annual product revenue and nonmanufacturing expenses are not expected to be impacted. Old Machine Cost, 10 year life 108,000 Annual Depreciation 10,800 Annual Manufacturing Costs (excl. Dep.) 38,600 Annual nonmanufacturing expenses (e.g., marketing) 12,300 Annual product revenue 95,000 Selling price of machine 35,900 New Machine Cost, 6 year life 138,000 Annual Depreciation 23,000 Annual Manufacturing Costs (excl. Dep.) 18,200 1. Prepare a differential anaysis comparing present machine (Alt. 1) to new machine (Alt. 2). Analysis should indicate total differential income over the six-year period if the new machine is purchased. Old Machine New Machine Differential (Alt. 1) (Alt. 2) Income Revenues Costs Income (Loss) 2. Which Alternative would you propose and why? 3. What other factors should be considered when making such a decision? 4. What if you could invest the funds required to purchase the new equipment (cost less proceeds from sale of old machine) at 4% per year with no risk. Does this change your viewpoint? What does this indicate of the limitations of this method for evaluating an investment proposal?