A three year old machine purchased for $540,000 is not able to meet today's market demands. the machine can be sold to a sub contracting company for $110,000 now. the current machine has an annual operating cost of $85,000 per year and a $30,000 salvage value in three years. If kept, the presently owned machine will be retained for only 3 more years, then replaced with a machine to be used in the manufacture of several other product lines. The replacement machine, which wi serve the company now and for at east 8 years, w cost $220,000. Its salvage value will be $50,000 for years 1 through 4 $20,000 after 5 years; and $10,000 thereafter. It will have an estimated operating cost of $65,000 per year. Perform an economic analysis at 15% per year using a 3-year planning horizon. (a) Should the company replace the presently owned machine now, or do it 33 years from now?
(b) Compare the capital recovery requirements for the replacement machine (challenger) over the study period and an expected life of 88 years.