A small company that manufactures vibration isolation platforms is trying to decide whether it should upgrade the current assembly system (System D), which is rather labor-intensive, with one that is more highly automated (System C). Some components of the current system can be sold now for $9000, but they will be worthless hereafter. The operating cost of the existing system is $192,000 per year. System C will cost $320,000 with a $50,000 salvage value after four years. Its operating cost will be $68,000 per year. If you are told to do a replacement analysis over a 2-year planning period using an interest rate of 10% per year, which system do you recommend? Assume the salvage value of system C after two years is estimated at $100,000.

System D System C

Market value, $ 9,000 320,000

Annual cost, $/year -192,000 -68,000

Salvage value, $ 0 50,000

Life, years 2 4