Question

Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $601,400 and has $352,300 of accumulated depreciation to date, with a new machine that has a purchase price of $483,200. The old machine could be sold for $61,300. The annual variable production costs associated with the old machine are estimated to be $158,500 per year for eight years. The annual variable production costs for the new machine are estimated to be $100,600 per year for eight years. a. 1 Prepare a differential analysis dated September 13, to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter". 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) September 13 Continue with Old Machine (Alternative 1) Replace Old Machine (Alternative 2) But Proceeds from sale of old machines Costs Differential Effect on Income (Alternative 2) Darchure Variable production costs (years) 3.2 Determine whether to continue with (Alternative 1) or replace Alternative 2) the old machine

Answer 1

a1)

	Continue with old machine	Replace old machine	Differential effect on income
Revenues:
Proceeds from sale of old machine	0	61,300	61,300
Costs:
Purchase price	0	- 483,200	- 483,200
Variable production costs (8 years)	- 1,268,000	- 804,800	463,200
Income (loss)	- $1,268,000	- $1,226,700	$41,300

Variable production costs (8 years) of old machine = 158,500 x 8

= $1,268,000

Variable production costs (8 years) of new machine = 100,600 x 8

= $804,800

a2)

Old machine should be replaced by the new machine. Replacing old machine will provide an income of $41,300

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