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The video tutorial explains incremental analysis for deciding whether to replace or retain equipment. It compares costs associated with two alternatives, focusing on relevant items such as variable manufacturing costs and the cost of new equipment. The book value of the old machine is considered a sunk cost, which does not influence the decision since it cannot be altered by current or future choices. Book value refers to the equipment cost minus accumulated depreciation. If the equipment is eliminated without trade-in value, the book value results in a loss on the income statement rather than simply continuing depreciation, both affecting the income statement similarly.
