Scenario $2$: Replacement Decision

Background: Alamac Building Products is considering replacing an old machine with a new one that offers greater efficiency and less maintenance. The old machine has a book value of $$250,000$ and can be sold for $$200,000.$ The new machine costs $$800,000$ and is expected to save $$150,000$ annually in operating costs.

Task: Perform a replacement analysis using the concept of opportunity cost and explain the relevant and irrelevant costs in this decision. Calculate the payback period and discuss its adequacy as a measure of investment attractiveness for operational management decisions.