Question

A commercial oven with a book value of $67,000 has an estimated remaining 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 5-year life with no residual value. The new machine would reduce annual maintenance costs by $23,000. REQUIRED Provide a differential analysis on the proposal to replace the commercial oven.

Answer 1

Answer:

$13,500

Explanation:

The differential analysis of the proposal to replace the commercial oven is shown below:-  

The Total differential decrease in cost = Annual maintenance cost reduction × Number of years applicable

= $23,000 × 5

= $115,000  

Inflow cash = The Total differential decrease in cost + Proceeds from sale of equipment

= 115,000 + $8,500

= $123,500

The Net differential decrease in cost from replacing equipment = Inflow cash - Cost of new equipment

= $123,500 - $110,000

= $13,500