iHerb Inc. has several herb extractor evaporators that were purchased four years ago at a price of $20,000. These machines currently require annual maintenance costs of $2,000. However, the maintenance agreement with the manufacturer expires at the end of two years and iHerb expects annual maintenance to increase to $8,000 per year thereafter. The machines could be sold at the current year in marketplace, as is, for $8,000, but the expected sale price will decline to $3,500 at the end of two years. At the end of year 6, the machine's useful life will be over and they will be disposed of as valueless scrap.

iHerb is considering replacing these evaporators with a new machine that will accomplish the same job. The cost of the new machine is $25,000 and the manufacturer offers an 8-year maintenance contract of $1,000 per year. This machine will have an 8-year life and be worthless scrap at the end. Assume both equipment (new & old) is depreciated using 7-yr straight-line depreciation and has a tax rate of 39% (i.e., the old machine still have 4 years depreciation left). At a cost of capital of 7% (assume zero inflation), when should iHerb replace its evaporators?

(Hint: To make decision on whether and when iHerb shall replace the old machine, you would want to compare (1) EAC of continue operating the old machine (2) EAC if replace the old machine now with new machine (3) EAC if wait till end of year 2 to replace the old machine with new machine. (4) EAC if replace the machine till end of year 6)

Please use an Excel file with all relevant information clearly laid out. For each scenario, you would want to clearly lay out all the relevant cash flows, numbers that are not directly given by the case but are calculated based on case information shall be reflected in Excel as results of calculated number (i.e., I shall be able to see the underlying formula the number is arrived by clicking on the cellDo not just paste numbers in the submitted file as results of your calculation elsewhere). Please try to lay out the information and steps in a clear and organized way.

Have a final conclusion statement in bold font regarding whether and when shall iHearb replace its evaporators and briefly mention why.