1. **State the problem:** We have two machines: an old machine and a replacement machine. We want to analyze their costs and values over time to decide which is more cost-effective. 2. **Given data:** - Old Machine: Purchase price = 10000, Useful life = 10 years, Current age = 6 years, Remaining life = 4 years, Accumulated depreciation = 6000, Book value = 4000, Disposal value now = 2500, Disposal value in 4 years = 0, Annual operating cost = 5000. - Replacement Machine: Purchase price = 8000, Useful life = 4 years, Current age = 0, Remaining life = 4 years, Accumulated depreciation = 0, Book value = N/A, Disposal value now = N/A, Disposal value in 4 years = 0, Annual operating cost = 3000. 3. **Calculate the total cost of keeping the old machine for the next 4 years:** - Depreciation over 4 years = Book value - Disposal value in 4 years = 4000 - 0 = 4000. - Operating costs over 4 years = 4 * 5000 = 20000. - Total cost = Depreciation + Operating costs - Disposal value now (since we get cash now if disposed) = 4000 + 20000 - 2500 = 21500. 4. **Calculate the total cost of buying and using the replacement machine for 4 years:** - Purchase price = 8000. - Operating costs over 4 years = 4 * 3000 = 12000. - Disposal value in 4 years = 0. - Total cost = Purchase price + Operating costs - Disposal value in 4 years = 8000 + 12000 - 0 = 20000. 5. **Compare costs:** - Old machine total cost = 21500. - Replacement machine total cost = 20000. 6. **Conclusion:** The replacement machine is cheaper by 1500 over the next 4 years. This analysis helps decide whether to keep the old machine or replace it based on total costs over the remaining useful life.