Velodyne 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 companys 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 effects.