17.A commercial oven with a book value of $39,970 has an estimated remaining 5 y

Question

17.A commercial oven with a book value of $39,970 has an estimated remaining 5 year life. A proposal is offered to sell the oven for $12,490 and replace it with a new oven costing $71,400. The new machine has a 5-year life with no residual value. The new machine would reduce annual maintenance costs by $13,730.

Provide a differential analysis on the proposal to replace the commercial oven.

Annual maintenance cost reduction $ Number of years applicable Total differential decrease in cost $ Proceeds from sale of equipment $ Cost of new equipment Net differential decrease in cost from replacing equipment $

Explanation / Answer

Calculations Particulars Amount $ A Annual maintenance cost reduction          13,730 B Number of years applicable                    5 C = A x B Total differential decrease in cost          68,650 D Proceeds from sale of equipment          12,490 E = C + D Net Savings          81,140 F Cost of new equipment          71,400 G = E - F Net differential decrease in cost from replacing equipment            9,740

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