Answer Happy

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5. (20 points) A manufacturer is considering the replacement of one of its boring machines with a newer and more efficient one. The relevant details for both defender and challenger are as follows: • Defender: The current book value of the old boring machine is $60,000 and it has a remaining useful life of five years. The salvage value expected from scrapping the old machine at the end of five years is zero, but the company can sell the machine now to another firm in the industry for $15,000 Challenger: The new boring machine can be purchased at a price of $120,000 and has an estimated useful life of seven years. It has an estimated salvage value of $40,000 and is expected to realize economic savings on electric-power usage, labor, and repair costs and to reduce reworks. In total, annual savings of $30,000 will be realized if the new machine is installed. The firm uses a MARR of 15%. Using the opportunity-cost approach, a) What is the present value for keeping the defender and for switching to the challenger? b) Should the firm purchase the new machine based on Annual Equivalent Cost for each machine?