Replacement decisions in capital budgeting

Damco Ltd. is contemplating whether to replace an existing machine or to spend money overhauling it. The firm currently pays no taxes. The replacement machine costs US 90 million now and requires maintenance cost of US 10 million at the end of every year for eight years. At the end of eight years, it would have a salvage value of US 20 million and would be disposed. The existing machine requires an increasing amount of maintenance cost each year, and its salvage value decreases each year as illustrated below:

Year	Maintenance cost US 000	Salvage value US 000
0	0	4,000
1	1,000	2.500
2	2,000	2.500
3	3,000	1,000
4	4,000	0

If the existing machine is sold in year one, the resale price will be US 2.5 million and US 1 million must be spend on maintenance during the year to keep it running. The maintenance costs are paid at the end of the year. The machine will last for four years before it ceases to operate. The firm has an opportunity cost of 15%.

Required:

From your computation, advice the management of Damco Ltd. on when to replace the machine.