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XYZ Inc. is trying to decide its policy for replacement of a piece of equipment. The new equipment costs $8,000 and can be used for
XYZ Inc. is trying to decide its policy for replacement of a piece of equipment. The new equipment costs $8,000 and can be used for up to 5 years. At the end of 5 years it can be sold for its parts for $3,000. The maintenance and salvage values for the equipment in each year are as per the schedule below (salvage in year 0 is the same as the purchase price): Year 0 1 2 3 4 5 Maintenance 1000 200 200 700 1700 Salvage 8000 (initial cost) 5000 4500 4000 3500 3000 a) Compute the EAC assuming XYZ keeps the machine for 1, 2, 3, 4, and 5 years b) Compare these EACs and decide what is the optimal replacement cycle for this machine The relevant discount rate is 10%
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