Question

Subaru of Indiana Automotive has an overhead crane that has an estimated remaining life of 10 years. The crane can be sold now for $9,000. If the crane is kept in service, it must be overhauled immediately at a cost of $5,500. Operating and maintenance costs will be $3,000 per year after the crane is overhauled. The overhauled crane will have zero MV at the end of the 8-year study period. A new crane will cost $20,000, will last for 8 years, and will have a $4,500 MV at that time. Operating and maintenance costs are $1,100 per year for the new crane. The company uses a before-tax interest rate of 10% per year in evaluating investment alternatives. Should the company replace the old crane? What is the AW of the preferred alternative?