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) –408,000I
ncome (Loss) –$408,000 –$405,000 $ 3,000 
    
1 
$68,000 × 6 years 
2 
$58,000 × 6 years 
The company should replace the old machine.