Relevant Costs : Replacement Decission Rossman Instrument, Inc., is considering leasing new state-ofart machinery at an annual cost of $900,000. The new machinery has a four year expected life. It will replace existing machinery leased one year earlier at an annual lease cost of $490,000 committed for five years. Early termination of this lease contract will incure a $280,000 penalty. There is no other xed costs. The new machinery is expected to decrease variable product costs from $42 to $32 per unit because of improved materials yield, faster machine speed, and lower direct labor, supervision, material handling, and quality-inspection requirements. The sales price will remain at $56. Improvements in quality, production cycle time, and customer responsiveness are expected to increase annual sales from 36.000 units to 48.000 units. The variable product costs stated earlier exclude the inventory-carrying costs. Because the new machinery is expected to affect inventory levels, the following estimates are also provided. The enhanced speed and accuracy of the new machinery are expexted to decrease production cycle time by half, and consequently, lead to decrease in work in process inventory level from three months to just one-half months of production. Increased flexibility wth these new machines is expected to allow a reduction in finished goods inventory from two months of production to just one month. Improved yield rates and greater machine reliability will enable a reduction in raw material inventory from four months of production to just one and one-half months. Annual inventory carrying cost is 20% of inventory value