Your firm must decide if and when to replace an existing machine. Consider the following information.
• Defender: The defender has a current market value of $12,000. Its operating costs over the next year are estimated to be $3,750 and increase by 35% each year. The salvage value is expected to decrease by 20% each year.
• Challenger: The challenger will cost $18,000 and have operating costs of $3,300 in the first year, increasing by 30% each year thereafter. The salvage value is expected to decrease by 25% each year.
• Assume a MARR = 12% and do not consider any income-tax effects.
(a) Should the defender be replaced now?
(b) Determine the optimal replacement strategy if the total service life is three years.