SpeedCar Corporation makes toy cars that it can sell for $25 per car. Production manager Alex Carvahllo is considering whether to refurbish or replace the moulds that SpeedCar uses in the manufacturing process. The original cost of the moulds, purchased three years ago, was $600,000. They have an expected useful life of three more years, a terminal disposal value of $0, current disposal value of $100,000, and a book value of $300,000. Refurbishing the mould will not change its terminal disposal value (the expected disposal value of the new mould is also $100,000). The following additional information is available for the two alternatives:

1. Refurbishing will cost $400,000, whereas replacing will cost $800,000; both options will result in an expected useful life of four years.

2. Variable costs of production will be higher by $2 when using the refurbished mould, compared to the new mould.

3. Annual production of cars is expected to be 60,000 units.

The new equipment would be depreciated on a straight-line basis.

Required:

1. Should SpeedCar refurbish or replace the moulds? Show all calculations and explain.

2. The capital expenditure to replace the moulds is $800,000, but the demand is not known for certain. At what level of annual sales of cars will SpeedCar be indifferent between refurbishing and purchasing new moulds?