PROBLEM 10.8 The general manager of the engineering division of Modern Engineering Company is considering the replacement of a six-year old equipment. The company has to incur excessive maintenance cost of the equipment. The equipment has a zero written down value. It can be modernized at a cost of 120,000 enhancing its economic life to 5 years. The equipment could be sold for 20,000 after 5 years. The modernization of the equipment would help in material handling and in reducing labour and maintenance and remain costs. The company has yet another alternative. It can buy a new machine at a cost of 300,000 with an economic life. of 5 years with a terminal value of 760,000. The new machine is expected to be more efficient in reducing costs of material handling, labour and maintenance and repairs, etc. The annual costs are as follows: