Question

Havoc Industries is considering replacing a machine that is presently used in its production process. What would be the result of the differential analysis?

	Old Machine	Replacement Machine
Original cost	$55,000	$45,000
Remaining useful life in years	5	5
Current age in years	5	0
Book value	$33,000
Current disposal value in cash	$10,000
Future disposal value in cash (in 5 years)	$0	$0
Annual cash operating costs	$8,000	$4,000

($23,000)

$35,000

($15,000)

$15,000

Answer 1

Particulars	Continue with old machine	Replace with new machine	Difference
Income:
Sale of old machine	$                   -	$          10,000	$          10,000
Annual revenue	$                   -	$                   -	$                   -
	$                   -	$          10,000	$          10,000
Costs:
Cost of new machine	$                   -	$          45,000	$          45,000
Annual costs	$          40,000	$          20,000	$         (20,000)
Total costs	$          40,000	$          65,000	$          25,000
Net income/ (loss)	$         (40,000)	$         (55,000)	$         (15,000)

Answer is:

($15,000)

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