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The video tutorial explains incremental analysis for deciding whether to replace or retain equipment. It focuses on comparing costs affected by both options, particularly variable manufacturing costs and the cost of new equipment. The book value of the existing machine is considered a sunk cost, meaning it doesn't influence the current decision-making process. Book value refers to the cost of the equipment minus its accumulated depreciation. If the equipment is eliminated without trade-in value, this book value results in a loss on the income statement rather than continuing depreciation. Ultimately, both decisions impact the income statement similarly.