"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 $17,200. Its operating costs over the next year are estimated to be $5,800 and increase by 46% each year. The salvage value is expected to decrease by 31% each year.
Challenger: If and when your firm purchases the challenger, the challenger will cost $20,600 and have operating costs of $2,900 in its first year of operation, increasing by 20% each year thereafter. The salvage (or market) value is expected to decrease by 24% during each year of use.
Assume the MARR is 11% and do not consider any income-tax or depreciation effects.
Assume the total time your firm will need the machine is 3 years. Your firm wants to minimize its total 'present costs' over the span of 3 years. You can replace the machine immediately, after 1 year, after 2 years, or never. You can assume the cost for your firm to purchase the new machine 1 or 2 years later will be the same as it is now, and the pattern of increasing O&M costs and decreasing market values remains the same as is described. Enter the year (0, 1, 2, or 3) when you should replace the current machine. If you should replace the current machine immediately, enter 0. If you should never replace the machine, enter 3."