The market values and M&O costs associated with a presently owned machine and a possible replacement are shown below. The plant manager has told you that he is interested only in what happens over the next three years and that if the defender is to be replaced, it must be replaced now or kept for the entire 3-year study period. Using an interest rate of 10% per year, determine whether or not the defender should be replaced.

Defender Challenger Market Market value, M&O cost, value, M&O cost, Year $ $ $ $
0 40,000 80,000 1 32,000 55,000 65,000 37,000 2 23,000 55,000 39,000 37,000 3 11,000 55,000 20,000 37,000 4 19,000 38,000 5 11,000 39,000