Replace Equipment

A machine with a book value of $247,200 has an estimated six-year life. A proposal is offered to sell the old machine for $214,600 and replace it with a new machine at a cost of $280,400. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $50,900 to $40,700.

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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". If required, use a minus sign to indicate a loss.

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

	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effects (Alternative 2)
Revenues:
Proceeds from sale of old machine	$______	$_______	$______
Costs:
Purchase price	______	______	______
Direct labor (6 years)	______	______	_______
Profit (Loss)	$______	$______	$_______

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

Continue with the old machine/Replace the old machine