Nighthawk Inc is considering disposing of an old machine with a book value of $22500 and an estimated remaining life of three years The old machine can be sold for $6250 A new machine with a purchase

savings of $59,375.

To calculate the differential effect on income, we need to compare the costs and benefits of keeping the old machine versus purchasing the new machine.

Costs and benefits of keeping the old machine:

• Book value: $22,500
• Sale price: $6,250
• Net loss on disposal: $16,250
• Annual variable manufacturing costs: $43,750

Costs and benefits of purchasing the new machine:

• Purchase price: $68,750
• Annual variable manufacturing costs: $20,000
• Annual savings: $23,750 ($43,750 - $20,000)

To calculate the differential effect on income, we need to subtract the costs and benefits of the old machine from the costs and benefits of the new machine over the entire three-year period:

• Differential cost: $68,750 - $6,250 - $22,500 = $40,000
• Differential savings: $23,750 per year x 3 years = $71,250
• Differential effect on income: $71,250 - $40,000 - $16,250 = $15,000 per year x 3 years = $45,000

Therefore, the differential effect on income for the entire three years for the new machine is a savings of $59,375 ($45,000 in savings minus the $16,250 net loss on disposal of the old machine)