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Replacing an existing piece of equipment

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A company is considering replacing an existing piece of equipment. The company uses an interest rate of 7%. They have identified a lease option for similar equipment that will have an EAC of $7,500 (which includes the annual maintenance costs).

The current salvage value of the equipment they own is $15,000 and will decline to the following over the next 4 years: $12,500, $9,500, $6,500, and $3,500. The maintenance cost is $2,000 for Year 1, $3,000 for year 2, $4,000 for year 3, and $5,000 for year 4. Maintenance costs are assumed to occur at year end.

a) What is the marginal cost to extend service for the first year.

b) What is the marginal cost to extend service from the end of year 1 to the end of year 2.

c) What is the marginal cost to extend service from the end of year 2 to the end of year 3.

d) What is the marginal cost to extend service from the end of year 3 to the end of year 4.

e) When should the equipment be sold, and the company move to leasing?

Reference no: EM132387937

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