Navula Company is considering the purchase of new equipment to replace the existing equipment it currently has. Details of the new equipment are tabulated below: Invoice Price: $140,000 Freight Charges: $ 4,000 Installation Costs: $6,000 Expected useful life: 5 years Salvage value: 0 The new equipment is faster than the old equipment, and it is more efficient in its usage of materials. Existing equipment could be retained and used for an additional 5 years if the new equipment is not purchased and by that time the salvage value of the equipment would be zero. However, if the new equipment is purchased now, the existing machine would have to be scrapped. The current book value of the existing machine is $36,000 and the company uses the straight-line depreciation method. Navula Company’s accountant has accumulated the following data below regarding annual sales and expenses with and without the new equipment. DETAILS OLD EQUIPMENT NEW EQUIPMENT Production & Sale Output 12 000 units Increase by 10% Selling Price $100 $100 Gross Profit Rate 25% of sales 30% of sales Annual Selling Expenses $180,000 Increase by 10% Annual Administrative Expenses $100,000 $113,000 Required: Prepare an incremental analysis showing whether Navula Company should keep the existing equipment or buy the new equipment and write a recommendation based on your analysis to the Managing Director of Navula Company.

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