Five years ago, ARCHON, a regional architecture/contractor firm, purchased an HVAC unit for \($25,000.\) It is expected to last 10 more years with a net salvage value of \($0\) at the end of that time. Depreciation over the 5 years has been as MACRS-GDS 7-year property. The annual operating cost of this unit started at \($2,000\) in the first year and has increased steadily at \($250\) per year ever since; last year the cost was \($3,000.\) ARCHON has been phenomenally successful due to their reputation for highly functional, high-quality, cost-effective designs and construction. They are building a new wing at their regional headquarters to accommodate a much larger computer design emphasis requiring larger, faster computers, architectural printers, e-storage for a construction repository of previous designs, and an increased human heat load. They can buy an additional unit to air-condition the new wing for \($18,000.\) It will have a service life of 15 years, a net salvage of \($0\) at that time, and a \($3,000\) market value after 10 years. It will have annual operating costs of \($1,800\) in the first year, increasing at \($100\) per year. As an alternative, ARCHON can buy a new replacement unit to heat and cool the entire building for \($35,000.\) It will last for 15 years and have a net salvage of \($0\) at that time; however, it will have a market value of \($8,500\) after 10 years. It will have first-year operating costs of \($3,700/year,\) increasing at \($200\) per year. The present unit can be sold now for \($7,000.\) The after-tax MARR is 12 percent, the tax rate is 40 percent, and the planning horizon is 10 years.

a. Clearly show the cash flow profile for each alternative using a cash flow approach (insider’s viewpoint approach). 

b. Using a PW analysis and a cash flow approach (insider’s viewpoint approach), decide which is the more favorable alternative.

c. Using a PW analysis and a cash flow approach (insider’s viewpoint approach), decide which is the more favorable alternative, except note that a Section 1031 like-kind property exchange is to be used. The equipment replaced will continue to be replaced by like-kind investments in the United States indefinitely.