Susan Smith manages the Wexford plant of Sanchez Manufacturing. A representative of Darnell Engineering approaches Smith about replacing a large piece of manufacturing equipment that Sanchez uses in its process with a more efficient model. While the representative made some compelling arguments in favor of replacing the 3-year-old equipment, Smith is hesitant. Smith is hoping to be promoted next year to manager of the larger Detroit plant, and she knows that the accrual-basis net operating income of the Wexford plant will be evaluated closely as part of the promotion decision. The following information is available concerning the equipment replacement decision: Old Machine New Machine Original cost $800,000 $580,000 Useful life 5 years 2 years Current age 3 years 0 years Remaining useful life 2 years 2 years Accumulated depreciation $480,000 Not acquired yet Book value $320,000 Not acquired yet Current disposal value (in cash) $218,000 Not acquired yet Terminal disposal value (in cash 2 years from now) $0 $0 Annual operating costs (maintenance, energy, repairs, coolants, and so on) $820,000 $620,000 Sanchez uses straight-line depreciation on all equipment. Annual depreciation expense for the old machine is $160,000 and will be $290,000 on the new machine if it is acquired. For simplicity, ignore income taxes and the time value of money. Required: (12%) 1. Assume that Smiths priority is to receive the promotion and she makes the equipment-replacement decision based on the next 1-years accrual-based operating income. Which alternative would she choose? Show your calculations. 5 2. Which alternative is in the best interest of the company over the next 2 years? Show your calculations. 3. At what cost would Smith be willing to purchase the new equipment? Show your calculations.