A proposed investment consists of constructing a building, purchasing production machinery, and operating for 20 years; its first cost is $250,000 with a salvage value $50,000. Since the maximum life of the machinery is 12 years, it will be necessary to renew the machinery once during the 20 years. The first cost of the machinery is $132,000 and its salvage value is $132,000/(age, years). The annual income is less the operating expense is expected to be $50,000. Annual interest is 6 percent compounded annually.
a. When is the most favorable time to replace the machinery?
b. Compute the present worth of the profit if the machinery is replaced at the time indicated by part (a).