6-18B

Orr electronics purchased a manufacturing a plant four years ago for $4,500,000.00. The plant costs $1,000,000.00 per year to operate. Its current book value using straight line depreciation is $3,500,000.00. Orr could purchase a replacement plant for $8,000,000.00 that would have useful life of 10 years. Because of new technology, the replacement plant would require only $300,000.00 per year in operating expenses. T would have an expected salvage value of $2,000,000.00 after 10 years. The current disposal value of the old plant is $600,000.00, and if Orr keeps it 10 more years, its residual value would be $150,000.00.

Required:

Based on this information, should Orr replace the old plant? Support your answer with appropriate computations.