Paul Smith is considering replacing Jones & Smith's present dishwasher with a new energyefficient model. Although the old dishwasher has a present book value of $1,000, its current market value is $2,000 and, if held for five more years, this would drop to $300. If Paul decides not to buy the new machine, approximately $500 of repairs must be performed on the present dishwasher. The following is a schedule of expected annual expenses for each option over the next five years.

Keep present buy new

maintenance 400 200

labor 12,000 12,000

Energy 800 500

water 400 400

The new machine would cost $7,000 and is expected to have a salvage value of $2,000 at the end of five years.

1. Which costs are irrelevant?

2. Which alternative should Paul choose? Support your decision with only relevant numbers.