Replace Equipment

A machine with a book value of $245,500 has an estimated six-year life. A proposal is offered to sell the old machine for $215,200 and replace it with a new machine at a cost of $280,100. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $50,800 to $40,600.

Note: Consider an outflow a negative value; an inflow a positive value. If an amount is zero, enter "0".

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Prepare a differential analysis dated February 18, 2014, on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2).

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
February 18, 2014
		Continue with Old Machine (Alternative 1)		Replace Old Machine (Alternative 2)		Differential Effect on Income (Alternative 2)
Revenues:
Proceeds from sale of old machine		$ Correct 9 of Item 1		$ Correct 10 of Item 1		$ Correct 11 of Item 1
Costs:
Purchase price		Correct 14 of Item 1		Correct 15 of Item 1		Correct 16 of Item 1
Direct labor (6 years)		Correct 18 of Item 1		Correct 19 of Item 1		Correct 20 of Item 1
Income (Loss)		$ Correct 22 of Item 1		$ Correct 23 of Item 1		$ Correct 24 of Item 1