Exhibit 6.5 looks beyond 1 year. Examining the alternatives over the equipment’s entire life ensures that peculiar nonrecurring items, such as loss on disposal, will not obstruct the long run view vital to many managerial decisions. However, exhibit 6.5 presents both relevant and irrelevant items. Prepare an analysis that concentrates on relevant items only.

Exhibit 6.5

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Cash operating costs Old equipment (book value) Periodic write-off as depreciation or Lump-sum write-off Disposal value New machine Acquisition cost Total costs Four years together Keep €20,000 4,000 €24,000 Replace €12,000 4,000* -2,500* 8,000¹ €21,500 Difference €8,000 2,500 -8,000 €2,500 The advantage of replacement is €2,500 for the 4 years together. *In a formal income statement, these two items would be combined as 'loss on disposal' of €4,000 - €2,500 = €1,500. *In a formal income statement, written off as straight-line depreciation of €8,000 + 4 = €2,000 for each of 4 years.