Question

Replace Equipment A machine with a book value of $250,900 has an estimated six-year life. A proposal is offered to sell the old machine for $214,100 and replace it with a new machine at a cost of $282,000. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $50,600 to $40,500. Prepare a differential analysis dated October 3 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). If an amount is zero, enter "O". For those boxes in which you must enter subtracted or negative numbers use a minus sign. Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) October 3 Continue with Replace Old Differential Effect Old Machine Machine on Income (Alternative 1) (Alternative 2) (Alternative 2) Revenues: Proceeds from sale of old machine $ Costs: Purchase price Direct labor (6 years) Income (Loss) Should the company continue with the old machine (Alternative 1) or replace the old machine (Alternative 2)?

Answer 1

Company should continue with Alternative 1.

Differential Analysis Particulars continue with old machine (Alternative-1). continue with Replace old machine CAltemative -2) Differential Effect of ncome. (Alternative 2) $214,100 $0 $214,100 Revenues proceeds from sale of old machine costs : Purchase price Direct labor cost (6years) (-) 282,000 $282,000 $0 60,600 (-)303,600 (-1243,000 (71300) (303,600) (310,900) income (clos) as it has. The old machine should be continues greater differential income.

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