Suppose we are thinking about replacing a series of old computer systems with new computers. The...

Suppose we are thinking about replacing a series of old computer systems with new computers. The old ones cost us $420,000 one year ago and is depreciated at a rate of $140,000 a year and will be completely written off in 3 years.It can be sold for $190,000 now or sold for $80,000 in two years.

The new machine will cost $368,000 a year and will be depreciated at a rate of 10% a year. It is expected to be worth $198,000 after five years. The new machine will save $130,000 in maintenance costs per year. The tax rate is 38% and the discount rate is 13%.

Should we replace the computer now or should we replace the computer in two years or should we not replace the computer at all? What are the relevant cash flows? Explain.

Expert Solution

ekkarill92 answered 2 years ago

Suppose we are thinking about replacing a series of old computer systems with new computers. The...

Suppose we are thinking about replacing a series of old computer systems with new computers. The old ones cost us $420,000 one year ago and is depreciated at a rate of $140,000 a year and will be completely written off in 3 years.It can be sold for $190,000 now or sold for $80,000 in two years. The new machine will cost $368,000 a year and will be depreciated at a rate of 10% a year. It is expected to be...

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Suppose we are thinking about replacing a series of old computer systems with new computers. The...

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