A small foundry is considering the replacement of a No. 1 Whiting cupola furnace that is capable of melting gray iron only with a reverberatory-type furnace that can melt gray iron and nonferrous metals. Both furnaces have approximately the same melting rates for gray iron in pounds per hour. The foundry company plans to use the reverberatory furnace, if purchased, primarily for melting gray iron, and the total quantity melted is estimated to be about the same with either furnace. Annual raw material costs would therefore be about the same for each furnace. Available information and cost estimates for each furnace are given below.

Cupola furnace.

Purchased used and installed 8 year ago for a cost of $20,000. The present market value is determined to be $8,000.

Estimated remaining lifeis somewhat uncertain but, with repairs, the furnace should remain functional for 7 years more. If kept 7 years more, the salvage value is estimated as $2,000 and average annual expenses expected are: Fuel $35,000 Labor (including maintenance) $40,000 Payroll taxes 10% of direct labor costs Taxes and insurance on furnace 1% of purchase price Other $16,000

Reverberatory furnace.

This furnace costs $32,000. Expenses to remove the cupola and install the reverberatory furnace are about $2,400. The new furnace has an estimated salvage value of $3,000 after 7 years of use and annualexpenses are estimated as: Fuel $29,000 Labor (operating) $30,000 Payroll taxes 10% of direct labor costs Taxes and insurance on furnace 1% of purchase price Other $16,000

In addition, the furnace must be relined every 2 years at a cost of $4,000/occurrence. If the foundry presently earns an average of (MARR) 15% on invested capital before income taxes, should the cupola furnace be replaced by the reverberatory furnace? (not sure here if this applies to bothe furnaces or just the reverbatory one??????)

a. Use the cash flow approach. b. Use the opportunity cost approach.