Equipment upgrade versus replacement. (A. Spero, adapted) TechMech Company pro- ©

duces and sells 6,000 modular computer desks per year at a selling price of $500 each. Its | ota) uporade relevant costs current production equipment, purchased for $1,500,000 and with a five-year useful life, is ye3yre ar s, $5,220,000 only two years old. It has a terminal disposal value of $0 and is amortized on a straight-line basis. The equipment has a current disposal price of $600,000. However, the emergence of a %

new moulding technology has led TechMech to consider either upgrading or replacing the production equipment. The following table presents expected costs under the upgrade and replace alternatives:

All equipment costs will continue to be amortized on a straight-line basis. For simplicity, ignore income taxes, interest, and present value considerations.
REQUIRED 1. Should TechMech upgrade its production line or replace it? Show all calculations.
2. Now suppose the capital expenditure needed to replace the production line is somewhat negotiable. All other data are as given previously. What is the maximum price that TechMech would be willing to pay for the new line to prefer replacing the existing line over upgrading it?
3. Assume that the capital expenditures needed to replace and upgrade the production Gece ae line are as given in the original question, but that the expected production and sales quantity is not known. For what production and sales quantity would TechMech prefer to (i) upgrade the line, (ii) replace the line?
4. Consider again the basic information given in this exercise. Suppose Dan Doria, the manager of ‘TechMech, is evaluated on operating income. Because he is likely to relocate after about a year, his current bonus is his primary concern. Which alternative would Doria choose? Explain.LO1

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One-time equipment costs Variable manufacturing costs per desk Remaining useful life of equipment Terminal disposal value of equipment Upgrade $2,700,000 $ 3 years Replace $4,200,000 80 3 years 140 $ 0 0