=+8-28 KKK Equipment upgrade versus replacement (A. Spero, adapted) OBJECTIVES 2, 7 The TechMech Company produces and sells 7500 modular computer desks per year at a selling price of $750 each. Its current production equipment, purchased for $1800000 and with a five-year useful life, is only two years old. It has a terminal disposal value of $0 and is depreciated on a straight-line basis. The equipment has a current disposal price of $450000. However, the emergence of a new moulding technology has led TechMech to consider either upgrading or replacing the production equipment.

The following table presents data for the two alternatives:

1 2

3 4

5 A B C Upgrade Replace One-time equipment costs $3 000 000 $4 800 000 Variable manufacturing cost per desk 150 75 Remaining useful life of equipment (years) 3 3 Terminal disposal value of equipment 0 0

$

$

$

$

All equipment costs will continue to be depreciated on a straight-line basis. For simplicity, ignore income taxes and the time value of money.

Required 1 Should TechMech upgrade its production line or replace it? Show your calculations.