A machine with a book value of $80,000 has an estimated five-year life. A proposal is offered to sell the old machine for $50,500

A machine with a book value of $80,000 has an estimated five-year life. A proposal is offered to sell the old machine for $50,500 and replace it with a new machine at a cost of $75,000. The new machine has a five-year life with no residual value. The new machine would reduce annual direct labor costs from $11,200 to $7,400. Prepare a differential analysis dated April 11, 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) 

April 11, 2014 

 Continue 

with Old 

Machine 

(Alternative 1) 

Revenues:    

Proceeds from sale of old machine $ 0 $50,500 $50,500 

Costs:    

Purchase price 0 –75,000 –75,000 

Direct labor (5 years) –56,000I

ncome (Loss) –$56,000 –$61,500 –$  5,500 

    

1 

$11,200 × 5 years 

2 

$7,400 × 5 years 

The company should continue with the old machine.