The answer is below. Please write the each step clearly

13. Your office is about to purchase a new machine at a cost of $64,000. You have forecast the following data relating to salvage value and operating costs over the next five years: SALVAGE VALUE AT THE END ANNUAL CASH OPERATING YEAR OF THE YEAR ($) EXPENSES ($) 1 50,000 11,000 13,000 2 40,000 3 30,000 18,000 4 23,000 24,000 5 3,500 28,000 If the machine is replaced every two years, $11,000 in expenses are incurred in year one and $13,000 in year two, and so on. The required rate of return is 15% p.a. The effects of company tax may be ignored (i.e., there is no need to calculate depreciation). What is the optimum replacement policy for this machine? That is, should the office replace the machine every year, or every two years, or what? The PV and AE for all alternatives are (see excel sheet for details): Replace every 1 year 2 years 3 years 4 years 5 years NPV of cost -30,086.96 -53,149.34 -75,504.89 -95,802.13 -121,133.29 AE cost -34,600.00 -32,693.02 -33,069.40 -33,556.17 -36,135.94 PV cost in perpetuity -230,666.67 -217,953.49 -220,462.68 -223,707.78 -240,906.29 Since we want to minimize the annual cost, we would choose to replace the machine every two years. 13. Your office is about to purchase a new machine at a cost of $64,000. You have forecast the following data relating to salvage value and operating costs over the next five years: SALVAGE VALUE AT THE END ANNUAL CASH OPERATING YEAR OF THE YEAR ($) EXPENSES ($) 1 50,000 11,000 13,000 2 40,000 3 30,000 18,000 4 23,000 24,000 5 3,500 28,000 If the machine is replaced every two years, $11,000 in expenses are incurred in year one and $13,000 in year two, and so on. The required rate of return is 15% p.a. The effects of company tax may be ignored (i.e., there is no need to calculate depreciation). What is the optimum replacement policy for this machine? That is, should the office replace the machine every year, or every two years, or what? The PV and AE for all alternatives are (see excel sheet for details): Replace every 1 year 2 years 3 years 4 years 5 years NPV of cost -30,086.96 -53,149.34 -75,504.89 -95,802.13 -121,133.29 AE cost -34,600.00 -32,693.02 -33,069.40 -33,556.17 -36,135.94 PV cost in perpetuity -230,666.67 -217,953.49 -220,462.68 -223,707.78 -240,906.29 Since we want to minimize the annual cost, we would choose to replace the machine every two years