Johnson Co$.$ is considering replacing a machine that has been used for four years.

Assume neither the new or old machine has a residual value.

Annual product revenue and nonmanufacturing expenses are not expected to be impacted.

New Machine

$1.$ Prepare a differential anaysis comparing present machine $($Alt$.1)$ to new machine $($Alt$.2).$ Analysis should indicate total differential income over the six$-$year period if the new machine is purchased.

Old Machine

$($Alt$.1)$

New Machine

$($Alt$.2)$

Differential

Income

$2.$ Which Alternative would you propose and why?

$3.$ What other factors should be considered when making such a decision?

$4.$ What if you could invest the funds required to purchase the new equipment $($cost less proceeds from sale of old machine$)$ at $4\backslash \%$ per year with no risk. Does this change your viewpoint? What does this indicate of the limitations of this method for evaluating an investment proposal?