27. A highway construction fi rm purchased a particular earth-moving machine 3 years ago for $125,000. The salvage value at the end of 8 years was estimated to be 35% of fi rst cost. The fi rm earns an average annual gross revenue of $105,000 with the machine and the average annual operating costs have been and are expected to be $65,000.

The fi rm now has the opportunity to sell the machine for $70,000 and subcontract the work normally done by the machine over the next 5 years. If the subcontracting is done, the average annual gross revenue will remain $105,000 but the subcontractor charges $85,000/end-of-year for these services.

If a 15% rate of return before taxes is desired, use a cash fl ow approach to determine by the annual worth method whether or not the fi rm should subcontract.