Question
Hayden Inc. has a number of copiers that were bought four years ago for $21,000. Currently maintenance costs $2,100 a year, but the maintenance agreement
Hayden Inc. has a number of copiers that were bought four years ago for $21,000. Currently maintenance costs $2,100 a year, but the maintenance agreement expires at the end of two years and thereafter the annual maintenance charge will rise to $8,100. The machines have a current resale value of $8,100, but at the end of year 2 their value will have fallen to $3,600. By the end of year 6 the machines will be valueless and would be scrapped.
Hayden is considering replacing the copiers with new machines that would do essentially the same job. These machines cost $26,000, and the company can take out an eight-year maintenance contract for $1,300 a year. The machines will have no value by the end of the eight years and will be scrapped.
Both machines are depreciated by using seven-year MACRS, and the tax rate is 40%. Assume for simplicity that the inflation rate is zero. The real cost of capital is 8%.
a. Calculate the equivalent annual cost, if the copiers are: (i) replaced now, (ii) replaced two years from now, or (iii) replaced six years from now. (Do not round intermediate calculations. Enter your answers as a positive value rounded to 2 decimal places.)
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