Question

Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $597,700 and has $347,700 of accumulated depreciation to date, with a new machine that has a purchase price of $486,500. The old machine could be sold for $64,300. The annual variable production costs associated with the old machine are estimated to be $155,500 per year for eight years. The annual variable production costs for the new machine are estimated to be $100,200 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 "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)
September 13
	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

a. 1)	Differential Analysis
		Alternative 1 (Continue with old machine)	Alternative 2 (Replace Old Machine)	Differntial effect on income (Alternative 2)
	Revenue:
	Proceeds from sale of old machine	-	64,300	64,300
	Cots:
	Purchase PRICE	-	486,500	486,500
	Variable production cost (8 Years)	155,500	100,200	(55,300)
	Income / (Loss)	(155,500)	(522,400)	(366,900)