!Question:

The owner of a bowling alley, an engineer by training, purchases a MARGARITA MACHINE for $7, 500. For depreciation purposes, the machine has a 5-year recovery period. After two years of usage, it appears to be less attractive than the MASTER BLENDER, capable of a wider variety of frozen concoctions. The details of the current asset for the remainder of its life are shown below with those of the possible replacement challenger. The defender market value will be $1,000 at the end of the third additional year. How many more years should the asset be retained? Interest is 10% per year, Ignore inflation and taxes. Income generated by either machine is assumed to be identical. __Next three years for Margarita machine__ || Additional years|| Value at beginning of year|| Annual operating cost|| Multi-concotion master blender|| | 1| $4,500| $3,000| First Cost| $10,000 | 2| 3,000| 3,500| Operating Cost| 3,000/yr | 3| 1,500| 4,000| Life| 7 Years | | | | Salvage Value| 1,000

1. How many more years should the asset be retained using a One-additional year analysis? 2. What would be the true ESL of the defender using the minimum-cost- life technique? 3. Assuming a planning horizon of five years (making the defender and challenger equal-life alternatives) demonstrate a.) the opportunity cost method and b.) the cash flow method of replacement analysis