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The video tutorial explains incremental analysis for deciding whether to replace or retain equipment. It focuses on comparing costs related to both alternatives, including variable manufacturing costs and the cost of new equipment. The book value of the existing equipment is described as a sunk cost, which does not affect current or future decisions, as it cannot be changed. Book value is defined as the cost of the equipment minus its accumulated depreciation. If the equipment is eliminated without trade-in value, the book value results in a loss on the income statement rather than a depreciation expense, which similarly affects the income statement.