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Duluth Medico purchased a digital image-processing machine three years ago at a cost of $50,000....

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Accounting

Duluth Medico purchased a digital image-processing machine three years ago at a cost of $50,000. The machine had an expected life of eight years with a salvage value of $5,000. The old machine can be sold today for $10,000. The old machine has been slow at handling the increased business volume, so management is considering replacing the machine. A new machine can be purchased for $75,000, including installation costs. Over its five-year life, the machine will reduce cash operating expenses by $30,000 per year. At the end of its useful life, the machine is estimated to be worthless. Sales are not expected to change. The firms interest rate for project justification (MARR) is 15% per year. The firm does not expect a better machine (other than the current challenger) to be available for the next five years. Assuming that the economic service life of the new machine, as well as the remaining useful life of the old machine, is five years, should the company replace the defender now? Arrive at your answer in the following steps:

a. Identify the Defender and Challenge

rb. Draw the cash diagrams for each

c. Calculate the AE for each

d. Determine whether the Challenger should replace the defender now

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