An oven with a book value of $67,000 has an estimated 5 year life. A proposal is

Question

An oven with a book value of $67,000 has an estimated 5 year life. A proposal is offered to sell the oven for $8,500 and replace it with a new oven costing $110,000. The new machine has a five year life with no residual value. The new machine would reduce annual maintenance costs by $23,000. Provide a differential analysis on the proposal to replace the machine. Annual maintenance cost reduction Number of years applicable Total differential decrease in cost Proceeds from sale of equipment Cost of new equipment Net differential decrease in cost from replacing equipment

Explanation / Answer

Annual cost reduction=$23000

Number of years applicable=5 years

Total cost saving=$115000

Proceeds from old machine=$8500

Total benefit=$123500

Cost of new equipment=$110000

Net differencial Decrease in cost=$13500

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