2. Raleigh Ltd produces office desks for a furniture supplier. The demand is 6,000 desks per year and the price per desk is 800. The variable manufacturing costs are 300. The current production equipment was bought for 4,000,000 on 1 January nearly two years ago, with an expected life of five years and no disposal value. The machine is being depreciated on a straight line basis. Now (after nearly two years of using the machine) better processes are available which could be installed by 1 January next year. In order to stay competitive, Raleigh Ltd needs to either upgrade the current machine or replace it. The disposal value of the existing machine after exactly two years of use, at 1 January next year, will be 800,000. The table below shows the costs of the two alternatives: Initial equipment costs Upgrade 2,000,000 Replace 4,200,000 Variable manufacturing costs per desk 180 80 Remaining useful life 3 3 Disposal value of equipment EO 800,000 All equipment costs will continue to be depreciated on a straight line basis. You should ignore taxes and the time value of money. a. Assuming that the demand level and price per desk will remain the same for the next three years, should the company continue with the current equipment, upgrade or replace it? Show your calculations. b. If it were possible to negotiate the price of either the upgrade or replacement equipment, how much would Raleigh Ltd be prepared to pay to change the option? c. The manager who will make the decision is rewarded on the basis of operating income and is hoping for promotion after about one more year. Show calculations of the year three profit for each alternative (assume the sale of the original equipment takes place on 1 January of the third year). Explain which option the manager should choose