Question

Hayden Inc. has a number of copiers that were bought four years ago for $28,000. Currently maintenance costs $2,800 a year, but the maintenance agreement expires at the end of two years and thereafter the annual maintenance charge will rise to $8,800. The machines have a current resale value of $8,800, but at the end of year 2 their value will have fallen to $4,300. 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 $33,000, and the company can take out an eight-year maintenance contract for $1,100 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 7%.

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.)

Hayden Inc. has a number of copiers that were bought four years ago for $28,000. Currently maintenance costs $2,800 a year, but the maintenance agreement expires at the end of two years and thereafter the annual maintenance charge will rise to $8,800. The machines have a current resale value of $8,800, but at the end of year 2 their value will have fallen to $4,300. 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 $33,000, and the company can take out an eight-year maintenance contract for $1,100 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 7%. a. Calculate the equivalent annual cost, if the copiers are: (1) replaced now, (li) replaced two years from now, or (i) replaced six years from now. (Do not round intermediate calculations. Enter your answers as a positive value rounded to 2 decimal places.) Equivalent Annual Cost () Replaced now (H) Replaced two years from now (i) Replaced six years from now b. When should Hayden replace its copiers? Replace in two years Replace now O Replace after six years

Answer 1

The equivalent Annual cost calculated by MACRS depereciation method as mentioned below w.r.t. year...

	#	OLD	New
1	Equivalent Annual Cost Now (5th Year) (Mainatinace cost for the Year+ Depereciation cost for the year)	5,093.76	9,350.00
2	Equivalent Annual Cost after 2 years from Now (i.e 3rd year operation for New Machine & 7th Year operation for Old Machine )   i.e.(Mainatinace cost for the Year+ Depereciation cost for the year)	8,118.01	5,740.63
3	Equivalent Annual Cost after 6 years from Now (i.e 11th Year operation for Old Machine & 7th Year operation for New Machine)   i.e.(Mainatinace cost for the Year+ Depereciation cost for the year)	9,551.62	2,568.32

Depreciation in 1st Year =
Cost ×	1	× A × Depreciation Convention
	Useful Life
Depreciation in Subsequent Years =
(Cost − Depreciation in Previous Years) ×	1	× A
	Recovery Period

Cost of Capital	7%
tax Rate	40%
Copiers Purchase price	28000	4 Years ago	Depereciation in 1st year	5600
Useful Life	10	years	2nd year	4480
Current Maintainance cost	2800	Per Year	3rd year	3584
Maintainance costAfter 2 years	8800		4th year	2867.2
			5th year	2293.76
Current Re Sale values	8800		6th Year	1835.008
Re Sale Value after 2 Years	4300		7th Year	1468.006
Re Sale Value after 6 Yers	0	As a scrap	8th year	1174.405
			9th year	939.5241
			10th year	751.6193
new machine Calculation
Current New Machine cost	33000		Depereciation 1st year	8250
8 Year maintainace contract	1100	Per year	2nd year	6187.5
Re Sale Value after 8 Yers	0	as a scrap	3rd year	4640.625
			4th year	3480.469
			5th Year	2610.352
			6th Year	1957.764
			7th Year	1468.323