Question

Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $600,700 and has $347,800 of accumulated depreciation to date, with a new machine that has a purchase price of $483,600. The old machine could be sold for $62,100. The annual variable production costs associated with the old machine are estimated to be $157,600 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,200 per year for eight years. a. Prepare a differential analysis dated April 29, to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter zero "0". 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) April 29 Continue with Old Machine (Alternative 1) Replace Old Machine (Alternative 2) Differential Effect on Income (Alternative 2) Revenues: Proceeds from sale of old machine $ $ $ Costs: Purchase price Variable productions costs (8 years) Income (Loss) $ $ $

Answer 1

	DIFFERENTIAL EFFECT ON INCOME : 29 April
	Year	1	2	3	4	5	6	7	8	Total
	Sale of Old Machine	$ 62,100	$ 0	$ 0	$ 0	$ 0	$ 0	$ 0	$ 0	$ 62,100
	Purchase Cost	$ -4,83,600	$ 0	$ 0	$ 0	$ 0	$ 0	$ 0	$ 0	$            -4,83,600
	Variable Production Cost Savings	$ 56,400	$            56,400	$            56,400	$            56,400	$            56,400	$            56,400	$            56,400	$            56,400	$ 4,51,200
	(157600-101200)
	NET EFFECT	$            -3,65,100	$            56,400	$            56,400	$            56,400	$            56,400	$            56,400	$            56,400	$            56,400	$ 29,700
	It is better to replace the old Machine(Alt 2).