Problem 6-26 Replacement decisions

Hayden Inc. has a number of copiers that were bought four years ago for $23,000. Currently maintenance costs $2,300 a year, but the maintenance agreement expires at the end of two years and thereafter the annual maintenance charge will rise to $8,300. The machines have a current resale value of $8,300, but at the end of year 2 their value will have fallen to $3,800. 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 $28,000, and the company can take out an eight-year maintenance contract for $1,400 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 10%.

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.)

b. When should Hayden replace its copiers?