This question is based on the textbook:

Engineering Economic Analysis, Third Canadian Edition. D. Newnan, J. Whittaker, T. Eschenbach, J. Lavelle. Oxford University Press.

Please indicate any formula used. Thanks.

Question

A company is considering replacing an existing machine (defender) with newer machine (challenger). If repaired, the defender can be used for another 5 years. After that, it cannot be used and must be replaced regardless of economic value. The current market value of the defender is $7,500 (i.e., it can be sold now for $7,500). The defender will have a salvage value after 5 years of $500. If kept, the defender will require an immediate $1,500 overhaul.

The characteristics of the Defender are presented in the following table:

Year	Operating Cost	Maintenance Cost	Market Value
0	-	$1,500	$7,500
1	$2,000	$200	$4,800
2	$2,700	$300	$3,200
3	$3,800	$500	$2,000
4	$5,000	$1,000	$1,200
5	$6,500	$2,000	$500

The new machine (Challenger) has a service life of 7 years. It will cost $16,000 to purchase now. Its annual operation and maintenance cost combined is $1,600 per year in the first year. This annual operation and maintenance cost will increase by 42% per year for subsequent years. The market value of the challenger will decline by 22% every year over its service life. Use MARR equals 12%.

a] Find the economic lives of: [i] the defender and [ii] the challenger. b] Determine when the defender should be replaced.

Clearly show your calculations steps.