Question

Gull Corp. is considering selling its old popcorn machine and replacing it with a newer one. The old machine has a book value of $5,000, and its remaining useful life is five years. Annual costs are $4,000. A high school is willing to buy it for $2,000. New equipment would cost $18,000 with annual operating costs of $1,500. The new machine has an estimated useful life of five years. Prepare a differential analysis. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss. g

Answer 1

Answer and Explanation:

According to the scenario, computation of the given data are as follow:-

Present equipment - Annual variable cost  = $4,000

New equipment-Annual variable cost = $1,500

Difference between new and present equipment cost = $2,500 ( $4,000 - $1,500)

Useful life years 5

Total difference decrease between new and present equipment cost = (5 × $2,500) = $12,500

Sales of present equipment = $2,000

New equipment cost = $18,000

Net annual difference increase in cost-new equipment= (18,000 - $2000)

=$16,000

According to the analysis, the net difference increase in cost is more than the total differential decrease in cost, so there is no benefit in replacement of equipment.