Gull Corp. is considering selling its old popcorn machine and replacing it with

Question

Gull Corp. is considering selling its old popcorn machine and replacing it with a newer one. The old machine has a book value of $5,000 and its remaining useful life is 5 years. Annual costs are $4,000. A high school is willing to buy it for $2,000. New equipment would cost $18,000 with annual operating costs of $1,500. The new machine has an estimated useful life of 5 years.  

Should the machine be replaced?

Please complete a 3-column differential analysis and then state your decision on the issue.

Explanation / Answer

Differential Analysis Old New Saving from New machine Annual cost 4000 1500 2500 No. of years 5 Total annual cost saving 12500 Proceeds from sale of present Equipment 2000 Total savings if new machine is purchased 14500 Cost of New Equipment 18000 -18000 Annual differential Increase in cost if new popcorn machine purchased -$3500 So it is better to continue with the old popcorn machine as differntial cost is higher in new machine by $3500

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