Foghorn Leghorn is considering the replacement of an old egg-sorting machine used with his Foggy's Farm Fresh Eggs business. The old ,egg machine is not quite running eggs actly the way it was originally designed and will require an additional investment now of $2500 (expensed at time 0) to get it back in working shape. This old machine was purchased 6 years ago for $5000 and has been depreciated by the straight-line method at $500 per year. Six years ago the estimated salvage value for tax purposes was $1000. Operating expenses for the old machine are projected at $600 this next year and are increasing by $150 per year each year thereafter. Foggy projects that with refurbishing machine will last another 3 years, foggy believes that he could sell the old machine as-is today for $1000 to his friend Fido to sort bones. He also believes he could sell it 3 years from now at the barnyard flea market for $500. The new egg-sorting machine, a deluxe model, has a purchase price of $10,000 and will last 6 years, at which time it will have a salvage value of $1000. The new machine qualifies as a MACRS 7-year property and will have operating expenses of $100 the first year, increasing by $50 per year thereafter. Foghorn uses an after-tax MARR of 18% and a tax rate of 35% on original income.

(a) What was the depreciation life used with the defender asset (the old egg sorter)?

(b) Calculate the after-tax cash flows for both the defender and challenger assets.

(c) Use the annual cash flow method to offer a recommendation to Foggy. What assumptions did you make in this analysis?