=+18-28 KKK Equipment replacement, no income taxes OBJECTIVES 3, 5, 8 Tenilite Ltd manufactures luxury yachts in a state-of-the-art facility in Singapore. In 2016, Tenilite expects to deliver 48 yachts at an average price of $55000. Tenilite’s marketing vice-president forecasts growth of 10 yachts per year up to 2022. That is, demand will be 58 in 2017, 68 in 2018, 78 in 2019 and so on.

The plant cannot produce more than 48 yachts annually. To meet future demand, Tenilite must either modernise the plant or replace it. The old equipment is fully depreciated and can be sold for $500000 if the plant is replaced. If the plant is modernised, the costs to modernise it are to be capitalised and depreciated over the useful life of the updated plant. The old equipment is retained as part of the modernise alternative. The following data on the two options are available:

Modernise Replace Initial investment in 2016 $1750 000 $5 650 000 Terminal disposal value in 2022 $100 000 $2 500 000 Useful life 7 years 7 years Total annual cash operating costs per yacht $37 500 $30 500