Replace Equipment

A machine with a book value of $$246,800$ has an estimated remaining life of $6$ years. A proposal is offered to sell the old machine for $$216,100$ and replace it with a new machine at a cost of $$280,000.$ The new machine has a $6$ year life with no residual value. The new machine would reduce annual direct labor costs from $$51,000$ to $$40,800.$

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 $2$

Line Item Description

Revenues:

Proceeds from sale of old machine $

Costs:

Purchase price

Direct labor $(6$ years$)$

Profit $($loss$)$

Continue

with Old

Machine

$($Alternative $1)($Alternative $2)$

Replace

Old $ $

$

Differential

Effects

$($Alternative $2)$

$

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