The Dowling Company produces and sells 5,900 modular computer desks per year at a selling price of $480 each. Its current production equipment, purchased for $1,750,000 and with a five-year useful life, is only two years old. It has a terminal disposal value of $0 and is depreciated on a straight-line basis. The equipment has a current disposal price of $650,000. However, the emergence of a new molding technology has led Dowling to consider either upgrading or replacing the production equipment. The following table presents data for the two alternatives:

	Upgrade		Replace
One-time equipment costs	$2,400,000		$3,900,000
Variable manufacturing cost per desk	$120		$60
Remaining useful life of equipment (years)	3		3
Terminal disposal value of equipment	$0		0

All equipment costs will continue to be depreciated on a straight-line basis.

For simplicity, ignore income taxes and the time value of money.

1. Should

DowlingDowling

upgrade its production line or replace it? Show your calculations. (Only complete the necessary answer boxes.)

	Over 3 years		Difference
	Upgrade	Replace	in favour of Replace
Cash operating costs
Current disposal price
One time capital costs, written off
periodically as depreciation
Total relevant costs