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Cotner Clothes Inc. is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: (a) Machine 1903190-3, which has a cost of $190,000\$ 190,000, a 33-year expected life, and after-tax cash flows (labor savings and depreciation) of $87,000\$ 87,000 per year; and (b) Machine 3606360-6, which has a cost of $360,000\$ 360,000, a 66-year life, and after-tax cash flows of $98,300\$ 98,300 per year. Assume that both projects can be repeated. Knitting machine prices are not expected to rise because inflation will be offset by cheaper components (microprocessors) used in the machines. Assume that Cotner's WACC is 14%14 \%. Using the replacement chain and EAA approaches, which model should be selected? Why?

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In this problem, we are asked which model should be selected to be replaced if the replacement chain and EAA approaches are used.

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