1. (10 marks) The MTE Company creates college exams for university engineering economics professors. Currently, MTE subcontracts the printing of the exams to a third party (outside contractor). MTE is considering buying and installing a printing system of its own, which would necessitate a renovation of its office space to accommodate the system. The new printing system itself costs $20,000 and the installation costs (including office renovation) are estimated to be $5,000. Operating and maintenance costs are expected to be $10,000 in the first year and to rise at a rate of 5% per year. MTE estimates capital asset depreciation using a decline balance model with a rate of 40%, and uses a MARR of 15% for all capital investments and replacement decision analysis. Installation costs are sunk costs and cannot be depreciated. (a) Assuming there will be an ongoing need for the printing system, and assuming that the technology does not change, (i.e., no cheaper or better system will arise), how long should MTE keep the printing system before replacing it with a new one? In other words, what is the economic life of the printing system? (b) Currently, MTE pays the subcontractor $0.25 per page printed (excluding material costs) to print exams. Demand is forecast to be 200,000 pages per year. MTE is considering purchasing and installing the printing system to print the exams themselves, as described above. Should they do so now? (c) Jump forward 2 years from the situation described above. Two years ago, MTE did their replacement decision analysis and decided to buy and install the printing system to print their exams on their own. Their original projection of 200,000 pages per year turned out to be on the high side, and in the 2 years of operating their own printing system, actual demand has been only 150,000 pages per year. They estimate the current market value (salvage value) of the printing system is $7,200. Operating and maintenance costs remain consistent with their original estimate 2 years ago, and are not dependent on the number of pages printed. Should MTE sell the printing system and go back to subcontracting the printing at $0.25 per page? 1. (10 marks) The MTE Company creates college exams for university engineering economics professors. Currently, MTE subcontracts the printing of the exams to a third party (outside contractor). MTE is considering buying and installing a printing system of its own, which would necessitate a renovation of its office space to accommodate the system. The new printing system itself costs $20,000 and the installation costs (including office renovation) are estimated to be $5,000. Operating and maintenance costs are expected to be $10,000 in the first year and to rise at a rate of 5% per year. MTE estimates capital asset depreciation using a decline balance model with a rate of 40%, and uses a MARR of 15% for all capital investments and replacement decision analysis. Installation costs are sunk costs and cannot be depreciated. (a) Assuming there will be an ongoing need for the printing system, and assuming that the technology does not change, (i.e., no cheaper or better system will arise), how long should MTE keep the printing system before replacing it with a new one? In other words, what is the economic life of the printing system? (b) Currently, MTE pays the subcontractor $0.25 per page printed (excluding material costs) to print exams. Demand is forecast to be 200,000 pages per year. MTE is considering purchasing and installing the printing system to print the exams themselves, as described above. Should they do so now? (c) Jump forward 2 years from the situation described above. Two years ago, MTE did their replacement decision analysis and decided to buy and install the printing system to print their exams on their own. Their original projection of 200,000 pages per year turned out to be on the high side, and in the 2 years of operating their own printing system, actual demand has been only 150,000 pages per year. They estimate the current market value (salvage value) of the printing system is $7,200. Operating and maintenance costs remain consistent with their original estimate 2 years ago, and are not dependent on the number of pages printed. Should MTE sell the printing system and go back to subcontracting the printing at $0.25 per page