Replace Equipment

A machine with a book value of $$248,300$ has an estimated remaining life of $6$ years. A proposal is offered to sell the old machine for $$216,800$ and replace it with a new machine at a cost of $$282,100.$ The new machine has a $6-$year life with no residual value. The new machine would reduce annual direct labor costs from $$49,900$ to $$39,900.$

Question Content Area

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 Continue

with Old

Machine

$($Alternative $1)$ Replace

Old

Machine

$($Alternative $2)$ Differential

Effects

$($Alternative $2)$

Revenues:

Proceeds from sale of old machine $Proceeds from sale of old machine

$Proceeds from sale of old machine

$Proceeds from sale of old machine

Costs:

Purchase price Purchase price

Purchase price

Purchase price

Direct labor $(6$ years$)$ Direct labor $(6$ years$)$

Direct labor $(6$ years$)$

Direct labor $(6$ years$)$

Profit $($loss$)$ $Profit $($loss$)$

$Profit $($loss$)$

$Profit $($loss$)$

Question Content Area

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