Three Years Ago, a Company Purchased a System of Modular

Essay

Three years ago, a company purchased a system of modular office furniture at a cost of
$29,000. Straight- line depreciation with no salvage value and a 5- year recovery period was used to write off the capital investment. A market value of $12,600 is expected if the system is sold now. If the system is kept, the company expects annual maintenance costs of $5500 each year and zero market value at the end of useful life. If the company decides to buy a new system, the new system will cost $32,000 and have a zero market value at the end of the estimated life of 5 years. The company expects annual maintenance costs of
$8500 each year. Assume an effective tax rate of 39% and an after- tax MARR of 7% per year. Determine whether the replacement now is economical.