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This video tutorial explains incremental analysis for deciding whether to retain or replace equipment. It emphasizes comparing costs affected by both options, focusing on relevant items such as variable manufacturing costs and the cost of new equipment. The book value of the existing machine is identified as a sunk cost, meaning it does not influence the decision since it cannot be altered by current choices. The book value represents the cost of the equipment minus its accumulated depreciation, indicating that not all depreciation has been taken. If the equipment is discarded without trade-in value, the book value becomes a loss on the income statement, affecting financial reporting similarly to depreciation.