Hayden Inc. has a number of copiers that were bought four yearsago for $21,000. Currently maintenance costs $2,100 a year, but themaintenance agreement expires at the end of two years andthereafter the annual maintenance charge will rise to $8,100. Themachines have a current resale value of $8,100, but at the end ofyear 2 their value will have fallen to $3,600. By the end of year 6the machines will be valueless and would be scrapped.
Hayden is considering replacing the copiers with new machinesthat would do essentially the same job. These machines cost$26,000, and the company can take out an eight-year maintenancecontract for $1,300 a year. The machines will have no value by theend of the eight years and will be scrapped.
Both machines are depreciated by using seven-year MACRS, and thetax rate is 40%. Assume for simplicity that the inflation rate iszero. The real cost of capital is 8%.
a. Calculate the equivalent annual cost, if thecopiers are: (i) replaced now, (ii) replaced two years from now, or(iii) replaced six years from now. (Do not roundintermediate calculations. Enter your answers as a positive valuerounded to 2 decimal places.)
| | Equivalent Annual Cost |
| (i) Replaced now | $ |
| (ii) Replaced two years from now | $ |
| (iii) Replaced six years from now | $ |
|
b. When should Hayden replace its copiers?
| Replace in two years |
| Replace now |
| Replace after six years |
