4. Differential analysis: Replacing equipment

Batista Manufacturing has been using a particular machine for over 10 years and believes that it may be time to replace the machine. The company is trying to decide whether replacing the old machine is a wise economic decision. The company's controller puller together the following information on the old machine and the new machine:

Old Machine
Original cost	$493,000
Current accumulated depreciation	358,000
Estimated annual variable manufacturing costs for machine	85,500
Estimated selling price of machine	200,500
Estimated remaining useful life (in years)	6
New Mahcine
Purchase cost	$970,300
Estimated annual variable manufacturing costs for macine	52,200
Estimated residual value	0
Estimated useful life (in years)	6

Complete the following Two questions:

A. Differential Analysis

Continue with Old Machine (Alternative 1) or Replace Old Machine (Alternative 2)

	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
Annual variable costs (6 years)	513,000	313,200	199,800
Total costs
Income (loss)

B. Complete the following statement made by Batista's controller in his presentation to management about whether to continue with the old machine or replace it with the new machine.

We______________ replace the old machine with the new one, because the revenue from the sale of the old machine___________ the differential cost of the new machine. The differential__________without considering interest or taxes is________.