SMS Microsystems is considering the replacement of a confocal microscope (CFM) in the quality control department.

The closest CFM will require at least \($19,500\) for installation and will have an estimated economic life of 10 years; its end-oflife value is estimated to be roughly

\($3,000\) MV. Annual operational and maintenance expenses are estimated to average about \($14,000\) per year.

Due to the dynamic nature of microsystems technology, the existing system (defender) has a book value of \($7,000\) but a present market value of only \($4,000.\) It is estimated that over the next three years the system will have the MV, BV, and expense data shown in the table below. Using a before-tax interest rate of 17% per year, make a comparison to determine whether it is economical to make the replacement now.

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Year MV BV Expenses 1 $2,000 $4,000 $18,000 23 2 $1,000 $2,000 $24,000 3 $500 $1,000 $30,000