Five years ago, a conveyor system was installed in a manufacturing plant at a cost of $35,000. It was estimated that the system, which is still in operating condition, would have a useful life of eight years with a salvage value of $3,000. It was also estimated that if the firm continues to operate the system, its market values and operating costs for the next three years would be as follows.

A new system can be installed for $43,500; it would have an estimated economic life of 10 years with a salvage value of $3,500. Operating costs are expected to be $1,500 per year throughout the service life of the system. The firm's MARR is 18%. The sys-tem belongs to the seven-year MACRS property class. The firm's marginal tax rate is 35%.
(a) Decide whether to replace the existing system now.
(b) If the decision is to replace the existing system, when should replacement occur?

Operating Cost Book Year End Market Value Value 11.500 $15,000 11,000 7,000 3,000 0 5.200 3.500 1.200 $4,500 5,300 6,100