3-year-old Machine

Original price	$200,000
Sold for; OR	$40,000
Upgrade for	$80,000
Annual operating & Maintenance cost	$100,000
Salvage value in 3 years	$30,000

If upgrade, the machine can use for 3 more years only, then replaced with a new machine.

The replacement machine

Cost	$200,000
Shipping and handling charges	$20,000
Lifetime	8 Years
Salvage Value(Year 1-4)	$40,000
Salvage Value(Year 5)	$20,000
Salvage Value(After Year 5)	$10,000
Annual operating & Maintenance cost	$65,000

(Original)

A 3-year-old machine purchased by the company for $200,000 is getting old and unable to meet todays market demands. The machine can be upgraded now for $80,000 or sold for $40,000. The current machine will have an annual operating and maintenance (O&M) cost of $100,000 and a $30,000 salvage value in 3 years. If upgraded, the old machine will be retained for only 3 more years, then replaced with a new machine.

The replacement machine, which can serve the company now and for at least 8 years, costs $200,000. In addition, there are shipping and handling charges of $20,000. Its salvage value will be $40,000 for years 1 through 4; $20,000 after 5 years; and $10,000 thereafter. It will have an annual operating and maintenance cost of $65,000 per year.

Company wants to perform an economic analysis at 15% per year using a 3-year planning horizon.

Should the company replace the old machine now, or do it 3 years from now? Show detailed steps of your replacement analysis.