The Advanced Electrical Insulator Company is considering replacing a broken inspection machine which has been used to test the mechanical strength of electrical insulators with a newer and more efficient one.

Option 1: If repaired, the old machine can be used for another 8 years. However, the firm can sell it now to another firm in the industry for $8,000. If the machine is kept, it will require fixed annual maintenance of $2,200 (each year) . The operating costs are estimated at $2,000 during the first year, and these are expected to increase by 15% per year thereafter. Future market values are expected to decline by 35% each year over the previous years value. Option 2: The new machine costs $12,000 and will have operating costs of $1,200 in the first year, increasing by 20% per year thereafter. Annual maintenace cost is $1,500 (eaach year). The expected salvage value is $6,000 after one year and will decline 25% each year. The physical life of the new machine would last 10 years.

The company requires a rate of return of 15% before tax. Do repacement analysis to: (1) Find the economic service life for each option, and (2) What would you decide about keping or repacing the defender?