General Engineering Company is considering replacing an old vertical cylinder hon- ing machine that had been used for honing automobile and tractor cylinders after the boring process. GEC is considering two options: Option 1: Retain the old honing machine. If kept, the old machine can be used for another six years with proper maintenance. The firm does not expect to real- ize any salvage value from scrapping it in six years. The market value of the machine is expected to decline 25% annually over the previous year's market value. The operating costs are estimated at $3,500 during the first year and are expected to increase by $1,000 per year thereafter. 0 Option 2: Alternatively, the firm can sell the machine to another firm in the industry now for $4,000 and buy a new honing machine. The new machine costs $12.000 and will have operating costs of $2,300 in the first year, increasing by 20% per year thereafter. The expected salvage value is $8,000 after one year and will decline 30% each year thereafter. T