Sugar Sweet (SS) Company produces and sells 7,000 specialty Treats per year at a selling price of $850 each. Its current

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Sugar Sweet (SS) Company produces and
sells 7,000 specialty Treats per year at a selling price of $850
each. Its current production equipment, purchased for $1,850,000
and with a five-year useful life, is only two years old. It has a
terminal disposal value of $0 and is depreciated on a straight-line
basis. The equipment has a current disposal price of $500,000.
However, the emergence of a new technology has led SS to consider
either upgrading or replacing the production equipment. The
following table presents data for the two alternatives:
A
B
C
1 Choice
Upgrade
Replace
2
One-time equipment costs
$3,000,000
$4,800,000
3
Variable manufacturing cost per
Treat
$150
$70
4
Remaining useful life of equipment
(years)
3
3
5
Terminal disposal value of
equipment
0
0
Required
1. Should SS upgrade its production line or replace it? Show
your calculations.
(i) upgrade the equipment or (ii) replace the equipment?