A six-year-old computer numerical control (CNC) machine originally cost $10,000 and its current market value is $1,500. If the machine is kept in service for the next five years (after which it will have reached the end of its physical life), its operating costs and salvage estimates are given below.

	Total Operating Costs
Year	Operation and Repairs	Delays Due to Breakdowns	Salvage Value
1	$1,400	$600	$1,200
2	1,500	800	1,000
3	1,600	1,000	500
4	1,800	1,200	0
5	2,000	1,400	0

It is suggested that the machine be replaced by a new CNC machine of improved design at a cost of $5,500. It is believed that this purchase will completely eliminate breakdowns and the resulting cost of delays and that operation and repair costs will be reduced $200 a year from what they would be with the old machine. Assume a maximum life of 5 years for the challenger and a salvage value in year one of 70% of the initial cost and dropping by 30% per year thereafter. The firms required rate of return is 11%.

1. What is the economic service life of the defender? (3 marks)

2. What is the economic service life of the challenger? (3 marks)

3. Should we replace the defender today? Why/why not? (1 mark)

4. If we dont replace the defender today, when should we replace it? Show your work. (2 marks)