The MTE Company creates college exams for university engineering economics professors. Currently, MTEsubcontractsthe printing of the exams to a third party (outside contractor). MTEis considering buying and installing a printing system of its own, which would necessitatea renovationof its office space to accommodate the system. The new printing systemitself costs $20,000 and the installation costs (including office renovation) are estimated to be $5,000. Operating and maintenance costs are expected to be $10,000 in the first year and to rise at a rate of 5% per year. MTEestimates capital asset depreciation usinga decline balance model witha rate of 40%, and uses a MARR of 15% for all capital investmentsand replacement decision analysis. Installation costsare sunk costs and cannot be depreciated.

(a)Assuming there will be an ongoing need for the printing system, and assuming that the technology does not change, (i.e., no cheaper or better systemwill arise), how long should MTEkeep the printing systembefore replacing it with a new one? In other words, what is the economic life of the printingsystem?

(b)Currently, MTEpays the subcontractor$0.25 per pageprinted (excluding material costs) to print exams. Demand is forecast to be 200,000 pages per year. MTEis considering purchasing and installing the printingsystem to print the examsthemselves, as described above. Should they do so now?

(c)Jump forward 2 years from the situation described above. Two years ago, MTEdid their replacement decision analysis and decided to buy and install the printingsystem to print their exams on their own. Their original projection of 200,000pages per year turned out to be on the high side, and in the 2 years of operating their ownprinting system, actual demandhas been only150,000 pagesper year. They estimate the current market value (salvage value) of the printing system is $7,200. Operating and maintenance costs remain consistent with their original estimate 2 years ago, andare not dependent on the number of pages printed. Should MTE sell the printing systemand go back to subcontracting the printingat $0.25 per page?