25. The Ajax Specialty Items Corporation has received a 5-year contract to produce a new product. To do the necessary machining operations, the company is considering two alternatives.

Alternative A involves continued use of the currently owned lathe. The lathe was purchased fi ve years ago for $20,000. Today the lathe is worth

$8,000 on the used machinery market. If this lathe is to be used, special attachments must be purchased at a cost of $3,500. At the end of the 5-year contract, the lathe (with attachments) can be sold for $2,000. Operating and maintenance costs will be $7,000/year if the old lathe is used.

Alternative B is to sell the currently owned lathe and buy a new lathe at a cost of $25,000. At the end of the 5-year contract, the new lathe will have a salvage value of $13,000. Operating and maintenance costs will be $4,000/

year for the new lathe.

Using an annual worth analysis, should the fi rm use the currently owned lathe or buy a new lathe? Base your analysis on a minimum attractive rate of return of 15% and use a cash fl ow approach.