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This video tutorial explains incremental analysis for deciding whether to retain or replace equipment. It focuses on comparing costs impacted by both alternatives, primarily the variable manufacturing costs and the cost of new equipment. The book value of the old machine, considered a sunk cost, does not influence the decision, as it cannot be altered by current or future choices. Book value represents the original cost minus accumulated depreciation, and if the equipment is discarded without trade-in value, the book value results in a loss reflected on the income statement. Ultimately, both retaining and replacing the equipment have similar impacts on financial reporting.