A machine with a book value of $126,000 has an estimated six-year life. A proposal is offered to sell the old machine for $98,000
A machine with a book value of $126,000 has an estimated six-year life. A proposal is offered to sell the old machine for $98,000 and replace it with a new machine at a cost of $155,000. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $68,000 to $58,000. Prepare a differential analysis dated February 18, 2014, on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2).Answer:
Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) February 18, 2014 Continue with Old Machine (Alternative 1) Revenues: Proceeds from sale of old machine $ 0 $ 98,000 $ 98,000 Costs: Purchase price 0 –155,000 –155,000 Direct labor (6 years) –408,000Income (Loss) –$408,000 –$405,000 $ 3,000 1 $68,000 × 6 years 2 $58,000 × 6 years The company should replace the old machine.
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