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A machine was purchased three years ago at a cost of $15,000. The maintenance costs...

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Accounting

A machine was purchased three years ago at a cost of $15,000. The maintenance costs on the machine have risen steadily and currently amount to about $3,000 per year. The machine could be sold for $6,000. If retained, the machine will require an immediate $1,500 overhaul to keep it in operating condition and a second overhaul will be required in year five. MARR = 15%. The updated operating, overhaul cost, and market values over the next five years are as follows:

Year

O&M

Dn

Overhaul

MV

-3

-2

$3,000

-1

$4,800

0

$2,880

$1,500

$6,000

1

$3,000

$1,728

$4,000

2

$3,500

$1,728

$3,000

3

$3,800

$864

$1,500

4

$4,500

$1,000

5

$4,800

$5,000

$0

and the asset is classified as a five-year MACRS property and has a current book value of $5,760 if it is disposed of now. The firm's marginal tax rate is 40%, and its after tax MARR is 15%.

What is the equivalent annual cost of owing and operating the machine for two more years after taxes?

a.

$7,211

b.

$4,436

c.

$4,771

d.

$4,980

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