Final answer:
The marginal costs of the defender are $27,000 in year 1, $28,000 in year 2, and $35,000 in year 3. The defender should be replaced with the challenger at the end of year 3.
Step-by-step explanation:
To calculate the marginal costs of the defender each year, we need to consider the annual expenses and the change in market value. In year 1, the expenses are $15,000, and the change in market value is $85,000 - $73,000 = $12,000. Thus, the marginal cost in year 1 is $15,000 + $12,000 = $27,000. Similarly, in year 2, the expenses are $15,000, and the change in market value is $73,000 - $60,000 = $13,000. So, the marginal cost in year 2 is $15,000 + $13,000 = $28,000. In year 3, the expenses are $15,000, and the change in market value is $60,000 - $40,000 = $20,000. Therefore, the marginal cost in year 3 is $15,000 + $20,000 = $35,000.
To determine when to replace the defender with the challenger, we need to compare the annual EUAC of the challenger with the marginal costs of the defender. The EUAC of the challenger is given as $39,100. By comparing the EUAC with the marginal costs, we can determine the year in which the EUAC of the challenger is less than the marginal costs of the defender. In this case, the EUAC of the challenger is less than the marginal costs of the defender starting from year 3. Therefore, the defender should be replaced with the challenger at the end of year 3.