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The video tutorial covers incremental analysis for deciding whether to retain or replace equipment. It emphasizes comparing costs associated with both alternatives, focusing on variable manufacturing costs and the cost of new equipment. The book value of the old machine is identified as a sunk cost, irrelevant to the current decision since it cannot change based on future actions. Book value reflects the equipment's cost minus accumulated depreciation, and if the equipment is discarded without trade-in value, it results in a loss on the income statement. Ultimately, both retaining and replacing equipment will impact the income statement similarly.
