A lumber company that cuts fine woods for cabinetry is evaluating if it should retain the current bleaching system or replace it with the new one. The relevant costs of each system are known or estimated.
Current System
First Cost seven years ago, $ 450,000
Remaining Life, years 5
Current market value, $ 50,000
Annual Operating Costs, $/year 160,000
New System
First Cost, $ 700,000
Remaining Life, years 10
Annual Operating Costs, $/year 150,000
Future Salvage, $ 50,000
Use an interest rate of 10% per year to
a) Perform the replacement analysis and
b) Determine the minimum resale price needed to make the challenger replacement choice now.