A Manufacturing Company Is Considering Replacing a Broken Metal Cutting

A manufacturing company is considering replacing a broken metal cutting machine. Several options have been
proposed.
· Option 1: The broken machine can be sold today for $2,500.
· Option 2: It can be overhauled completely for $8,000, after which it will produce$3,000 in annual cash flows
over the next five years. The resale value of the asset at the end of five years is zero.
· Option 3: It can be replaced for $20,000. The life of the replacement machine is five years, and it has an
estimated salvage value of $3,000 at the end of five years. The anticipated operating cash flows for each year
will be $6,000.
If the firm's required rate of return of 15%, what should the company do?