Question

A machine with a book value of $80,000 has an estimated five-year life. A proposal is offered to sell the old machine for $50,500 and replace it with a new machine at a cost of $75,000. The new machine has a five-year life with no residual value. The new machine would reduce annual direct labor costs from $11,200 to $7,400.
Prepare a differential analysis whether to continue with the old machine or place the old machine.

Answer 1

Answer:

The company should continue with the old machine, because the company will lost $5,500 in 5 years with new machine.

Explanation:

Labor saving by using new machine in 5 years = 5* ($11,200 - $7,400) = $19,000

The cost for new machine = $75,000 for newly purchase  – sell old one for $50,500 = $24,500

So the total lost for new machine = cost of $24,500 – labor saving of $19,000 = $5,500