1. (Duluth Medico) Duluth Medico purchased a digital image- processing machine three years ago at a cost of $50,000. The machine had an expected life of eight years with a salvage value of $5,000. The old machine can be sold today for $10,000. The old machine has been slow at handling the increased business volume, so management is considering replacing the machine. A new machine can be purchased for $75,000, including installation costs. Over its five-year life, the machine will reduce cash operating expenses by $30,000 per year. At the end of its useful life, the machine is estimated to be worthless. Sales are not expected to change. The firm's interest rate for project justification (MARR) is 15% per year. The firm does not expect a better machine (other than the current challenger) to be available for the next five years. Assuming that the economic service life of the new machine, as well as the remaining useful life of the old machine, is five years, should the company replace the defender now? Arrive at your answer in the following steps: a. Identify the Defender and Challenger b. Draw the cash diagrams for each c. Calculate the AE for each d. Determine whether the Challenger should replace the defender now 2. (Replacement-Bill) An existing machine has marginal costs as indicated in the attached table. A replacement machine is being considered. Initial cost of the new machine is $20k. The operating cost of the new machine is $5k the first year and increases by $2k each year thereafter. Your company uses a MARR of 15%. a. Determine the optimum Life and AE for the challenger (year which minimizes AE) b. In which year should the existing machine be replaced? Year Marginal Cost 1 $10.OK 2 $12.Ok 3 $15.Ok 4 $20.0k 1. (Duluth Medico) Duluth Medico purchased a digital image- processing machine three years ago at a cost of $50,000. The machine had an expected life of eight years with a salvage value of $5,000. The old machine can be sold today for $10,000. The old machine has been slow at handling the increased business volume, so management is considering replacing the machine. A new machine can be purchased for $75,000, including installation costs. Over its five-year life, the machine will reduce cash operating expenses by $30,000 per year. At the end of its useful life, the machine is estimated to be worthless. Sales are not expected to change. The firm's interest rate for project justification (MARR) is 15% per year. The firm does not expect a better machine (other than the current challenger) to be available for the next five years. Assuming that the economic service life of the new machine, as well as the remaining useful life of the old machine, is five years, should the company replace the defender now? Arrive at your answer in the following steps: a. Identify the Defender and Challenger b. Draw the cash diagrams for each c. Calculate the AE for each d. Determine whether the Challenger should replace the defender now 2. (Replacement-Bill) An existing machine has marginal costs as indicated in the attached table. A replacement machine is being considered. Initial cost of the new machine is $20k. The operating cost of the new machine is $5k the first year and increases by $2k each year thereafter. Your company uses a MARR of 15%. a. Determine the optimum Life and AE for the challenger (year which minimizes AE) b. In which year should the existing machine be replaced? Year Marginal Cost 1 $10.OK 2 $12.Ok 3 $15.Ok 4 $20.0k