Question
Maliks has a number of copiers that were bought two years ago for $23,000. Maintenance costs of $1,800 will be for the remaining 3 years
Maliks has a number of copiers that were bought two years ago for $23,000. Maintenance costs of $1,800 will be for the remaining 3 years life of the machines. The machines have a current market value of $17,000 but at the end of year 2 their value will have fallen to $10,500 and be valueless at the end of year 3 when they are scrapped.
Maliks is considering replacing the machines with new ones that would do essentially the same job. These machines cost $18,500 and come with a five-year maintenance contract for $1000 a year. The machines will depreciate to zero after 5 years and will be scrapped then. Both machines are depreciated using straight line depreciation for five years with zero salvage value. The cost of capital is 7% and the tax rate is 25%.
What is the equivalent annual value of the new machine if the firm replaces old machine now?
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