Replace Equipment

A machine with a book value of $251,900 has an estimated six-year life. A proposal is offered to sell the old machine for $215,700 and replace it with a new machine at a cost of $281,000. 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.

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.

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)