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This video tutorial explains incremental analysis for deciding whether to retain or replace equipment. It emphasizes comparing costs associated with both alternatives, primarily focusing on variable manufacturing costs and the cost of new equipment. The sunk cost, represented by the old machine's book value, is highlighted as irrelevant to the current decision, since it cannot be altered by future choices. Book value is defined as the equipment's purchase cost minus accumulated depreciation. If the equipment is retired without trade-in value, its book value results in a loss on the income statement, affecting financial reporting similarly to depreciation. Both scenarios impact the income statement in the same way.
