Reference no: EM131210657

Gaia Research hospital purchased a digital image-processing machine three years ago at a cost of $45,000. The machine had an expected life of eight years at the time of purchase and an expected salvage value of $5,000 at the end of the eight years. However, the old machine has been slow at handling the increased business volume, so management is considering replacing it. A new machine can be purchased for $75,000, including installation costs. Over its five-year life, the new machine will reduce cash operating expenses by $33,000 per year. Sales are not expected to change. At the end of its useful life, the new machine is estimated to be worthless. The old machine can be sold today for $10,000. The hospital's interest rate for project justification is known to be 12%. The hospital does not expect a better machine (other than the current challenger) to be available for the next five years. Assume that the economic service life for the new machine and the remaining useful life for the old machine are both five years. Determine the cash flows associated with each option (keeping the defender versus purchasing the challenger). Should the hospital replace the defender now?