Machine Replacement Decision A company is considering replacing an old piece of

Question

Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $597,900 and has $352,500 of accumulated depreciation to date, with a new machine that costs $485,500. The old machine could be sold for $61,400. The annual variable production costs associated with the old machine are estimated to be $158,600 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,500 per year for eight years. Hide Prepare a differential analysis dated October 3, 2014, to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter zero "0". Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) October 3, 2014 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) $ $ $ Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.

Explanation / Answer

Differential analysis :

b) Continue old machine

Retain machine Replace machine Net income increase (decrease) Annual variable cost -158600 -101500 57100 New machine cost 0 -485500 -485500 Salvage value of old machine 0 61400 61400 Total -158600 -525600 -367000

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