A milling machine purchased by a machine tool company 12 years ago for $75,000 can be used for up to 2 years but only if upgraded at a cost of approximately $10,000. Otherwise, the estimated market values and operating cost shown below will apply. A challenger will cost $130,000 and have a maximum life of 3 years. It's market value and operating cost estimates are shown below. The machine tool company uses an interest rate of 12%/year in its economic decision making.

1)WHAT IS THE ECONOMIC SERVICE LIFE OF THE PROPOSED REPLACEMENT MACHINE?

2)WHAT IS THE RECOMMENDED COURSE OF ACTION?

Existing Machine Tool Market Proposed Replacement Market Value AOC, $/year -52,000 -61,000 , $/year -30,000 -32,000 -33,000 Value $ $ 110,000 95,000 70,000 Year 1 9,000 5,000