Al Hart of Hart Engineering is considering the purchase of a new copy machine. He purchased the old machine two years ago for \($8,500\). When it was purchased the old machine had an estimated useful life of eight years and a residual value of \($500\). The operating cost of the old machine is \($3,000\) per year. The old machine can be sold today for \($2,000\). A new machine can be bought today for \($10,000\) and would have an estimated useful life of six years with a residual value of \($1,000\). The operating cost of the new copy machine is expected to be \($1,500\) per year. The company’s cost of capital is 8 percent.

Required:

a. Prepare a relevant cost schedule showing the benefit of buying the new copy machine.

(For this requirement, ignore the time value of money.)

b. How much must the company invest today to replace the old copy machine?

c. If the company replaces the old copy machine, what is the increase in the company’s annual contribution margin?

d. If the company sells the old copy machine now to make room for the new one, it will not receive the \($500\) residual value at the end of its useful life. Instead, the company will receive the \($1,000\) residual value from the new copy machine. With this in mind, if the company buys the copy machine, what is the change in the residual value the company is to receive at the end of the six-year life of the equipment?

e. Calculate the net present value of replacing the old copy machine.

f. Do you think the company should replace the old copy machine?