Suppose you are thinking about replacing an old computer with a new one. The old one cost us 390,000. the new one will cost 780,000. the new machine will be depreciated straight line to zero over its five-year life. it will probably be worth about 140,000 after 5 years. The old computer is being depreciated at a rate of 130,000 per year. It will be completely written off in three years. If we don’t replace it now, we will ahve to replace it in two years. We can sell it now for 230,000; in two years, it will probably be worth 90,000. The new machine will save us 125,000 per year in operating costs. The tax rate is 38% and the discount rate is 15 %. A: Suppose we recognize that if we don’t replace the computer now, we will be replacing it in two years. Should we replace now or should we wait? Hint: What we effectively have here is a decision either to “invest” in the old computer (by not selling it) or to invest in the new computer. Notice that the two investments have unequal lives.
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