Question
Replace Equipment A machine with a book value of $25,000 has an estimated remaining life of 5 years. A proposal is offered to sell
Replace Equipment A machine with a book value of $25,000 has an estimated remaining life of 5 years. A proposal is offered to sell the old machine for $18,800 and replace it with a new machine at a cost of $40,000. The new machine has a 5-year life with no residual value. The new machine would reduce annual direct labor costs from $17,500 to $9,000. a. Prepare a differential analysis dated June 2 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 (Alt. 1) or Replace (Alt. 2) Old Machine June 2 Continue with Old Line Item Description Machine Replace Old Machine Differential Effects (Alternative 2) (Alternative 1) (Alternative 2) Revenues: Proceeds from sale of old machine Costs: Purchase price Direct labor (5 years) Profit (loss) Feedback Check My Work For the continue and replace alternatives subtract the costs from the revenues. Multiply the direct labor for the five-year life. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 1 from alternative 2. b. Should the company continue with the old machine (Alternative 1) or replace the old machine (Alternative 2)?
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