Darcy Roofing is faced with a decision. The company relies very heavily on the use of its 60-foot extension lift for work on large homes and commercial properties. Last year, Darcy Roofing spent $60,000 refurbishing the lift. It has just determined that another $40,000 of repair work is required. Alternatively, it has found a newer used lift that is for sale for $170,000. The company estimates that both lifts would have useful lives of 6 years. The new lift is more efficient and thus would reduce operating expenses by about $20,000 per year. Darcy Roofing could also rent out the new lift for about $10,000 per year. The old lift is not suitable for rental. The old lift could currently be sold for $25,000 if the new lift is purchased.
Prepare an incremental analysis for the life of the machines showing whether the company should replace the equipment.

It has just determined that another $40,000 of repair work is required. Alternatively, it has found a newer used lift that is for sale for $170,000. The company estimates that both lifts would have useful lives of 6 years. The new lift is more efficient and thus would reduce operating expenses by about $20,000 per year. Darcy Roofing could also rent out the new lift for about $10,000 per year. The old lift is not suitable for rental. The old lift could currently be sold for $25,000 if the new lift is purchased.

Year 0= -170,000 + 25,000 + 40,000= -105,000

Year 1 trough 6= 20,000*6= 120,000

Effect on income= $15,000 favorable

suchetasVT suchetasVT · Answer 2 · 2022-03-19T08:43:41+01:00

The incremental analysis shows that the purchase of a new machine would increase the net income of the company for the period of 6 years by $ 27,000.

What is Incremental Analysis?

Incremental analysis is a decision-making process used in business to determine the true cost difference among various alternatives. It is also called a cost-effective method, a marginal analysis, or a differential analysis, an incremental analysis ignores any sunk costs or past costs.

The calculations relating to the decision-making on whether the company should replace the old equipment and purchase a new one is shown in the image below.

Hence, The incremental Analysis shows that the purchase of new machine would increase the net income of the company for the period of 6 years by $ 27,000.

Refer to the image attached to understand the calculation.

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