A six-year old CNC machine that originally cost $8,000 has been fully depreciated, and its current market value is $1,500. If the machine is kept in service for the next five years, its O&M costs and salvage values are estimated as follows:

It is suggested that the machine be replaced by a new CNC machine of improved design at a cost of $6,000. It is believed that this purchase will completely eliminate breakdowns, and the resulting combined savings in delays, operation, and repairs will be a reduction of $200 more a year at each age than is the case with the old machine. Assume a five-year life and a $1,000 terminal salvage value for the challenger. The new machine falls into the five-year MACRS property class. The firm€™s MARR is 12%, and its marginal tax rate is 30%. Should the old machine be replaced now?

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O & M Costs End of Operation and Repairs Delays due to Repairs Salvage Value Year $1,300 $600 $1,200 $1,500 $800 $1,000 $1,700 $1,000 $500 3 $1,900 $1,200 $0 4 $2,000 $1,400 $0