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Please help with this practice problem I am having difficulty with! Thank you in advance! Efficianado Inc. is trying to determine an optimal replacement policy
Please help with this practice problem I am having difficulty with! Thank you in advance!
Efficianado Inc. is trying to determine an optimal replacement policy for one of its machines. The cost of the machine is $15,000 and the annual maintenance costs are $1,000 in the first year, $2,000 in the second year and $3,000 in the third year. Anticipated salvage values are $6,000, $3,000 and $0 at the end of years 1 through 3, respectively. Assume that the company's revenues are unaffected by the replacement policy and that the firm has a 21% tax rate, and a 14% p.a. required return on this project. Should the equipment be replaced every year, every second year, or every third year? Be sure to explicitly consider the depreciation and tax effectsStep by Step Solution
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