Question

A machine with a book value of $121,730 has an estimated six-year life. A proposal is offered to sell the old machine for $87,800 and replace it with a new machine at a cost of $169,280. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $56,950 to $41,400.

	Required:
1.	Prepare a differential analysis dated February 18 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
2.	Should the company continue with the old machine (Alternative 1) or replace the old machine (Alternative 2)?

Answer 1

1
	Continue with the old machine	Replace the old machine	Differential effect on income
	Alternative 1	Alternative 2	Alternative 2
Revenues:
Proceeds from sale of old machine	0	87800	87800
Costs:
Purchase price	0	-169280	-169280
Direct labor (6 years)	-341700	-248400	93300
Income (loss)	-341700	-329880	11820
2
The company should replace the old machine (Alternative 2)