Answer:
a)
Opportunity Cost (Purchase value less Salvage Value)
Old Machine = $72,000 - $18,000 = <u>$54,000</u>
New Machine =$235,000 - $64,000 = <u>$171,000</u>
Operating Costs
Old Machine = $38,000 * 9 = <u>$342,000</u>
New Machine = $8,000 * 9 = <u>$72,000</u>
Total Cost = Opportunity cost + Operating Cost
Old machine Total Cost = $54,000 + $342,000 = $396,000
New Machine Total Cost = $171,000 + $72,000 = $243,000
b)
Should the old machine be replaced? YES
The cost of keeping the old machine is more than the cost of buying and operating the new machine, therefore it is advisable to replace the old machine.