A chemical company is considering replacing a batch-wise reactor with a modernized continuous reactor. The old unit cost $40,000 when new 5 years ago, and depreciation has been charged on a straight-line basis using an estimated service life of 15 years and final salvage value of $1000. It is now estimated that the unit has a remaining service life of 10 years and a final salvage value of $1000.
The new unit would cost $70,000 and would result in an increase of $5000 in the gross annual income. It would permit a labor saving of $7000 per year. Additional costs for taxes and insurance would be $1000 per year. The service life is estimated to be 12 years with a final salvage value of $1000. All costs other than those for labor, insurance, taxes, and depreciation may be assumed to be the same for both units. The old unit can now be sold for $5000. If the minimum required return on any investment is 15 percent, should the replacement be made?