1) A manufacturer is considering the replacement of one of its machines with a newer and more efficient one. The relevant details for both the defender and the challenger are as follows:

The current book value of the old machine is $60,000, and it has a remaining useful life of 5 years. The salvage value expected from scrapping the old machine at the end of 5 years is 0, but the company can sell the machine now to another firm for $13,000.

A new machine can be purchased at a price of $144,000 and has an estimated useful life of 7 years. It has an estimated salvage value of $40,000 and is expected to realize economic savings on power usage, labor and repair costs. In total, annual savings of $60,000 will be realized if the new machine is installed.

The firm uses a MARR of 15%. Using the opportunity-cost approach:

a) What is the initial cash outlay required for the new machine?

b) What are the cash flows for the defender in years 0-5?

c) Should the firm purchase the new machine?