Question 1 Caribbee Associates are considering two options for replacing existing machinery used to manufacture components. Component manufacture is currently in three stages with separate machine at each stage. The two options consist of replacement of existing machines with either new individual machines or with a single multi-purpose machine capable of performing all three operations. Operating expenses of the existing machine and those anticipated for the new machines are as follows: Existing New machines machines Operation 1 50,000 17.500 Operation 2 52,000 20,000 Operation 3 30,000 15,000 Multi-purpose 42,500 The economic life of the new machine is expected to be eight years. The existing machine could continue to be used for that period. Capital cost of the new machinery is as follows Operation 1 125,000 Operation 2 132,500 Operation 3 77,500 Multi-purpose 365,000 The new machine would have no value after eight years. The existing machine currently has no disposal value, but the book value is: Operation 1 4,000 Operation 2 4,500 Operation 3 3,000 The cost of capital is 14%. There are three alternatives: 1. Continue with the existing machines 2. Purchase the individual machines 3. Purchase the combined special purpose machine. Determine which option is most beneficial to the company