A manufacturer is considering replacing a production machine tool. The new machine, costing $37,000, would have a life of 4 years and no salvage value, but would save the firm $5000 per year in direct labor costs and $2000 per year in indirect labor costs. The existing machine tool was purchased 4 years ago at a cost of $40,000. It will last 4 more years and will have no salvage value. It could be sold now for $10,000 cash. Assume that money is worth 8% and that differences in taxes, insurance, and so forth are negligible. Use an annual cash flow analysis to determine whether the new machine should be purchased. Solution: 1. New machine EWAC = $ 2. Existing machine EUAC = $ 3. The new machine should purchased