Most businesses replace their computers every two to three years. Assume that a computer costs $2,000 and that it fully depreciates in 3 years, at which point it has no resale value and is thrown away.(LO1)
a. If the interest rate for financing the equipment is equal to i, show how to compute the minimum annual cash flow that a computer must generate to be worth the purchase. Your answer will depend on i.
b. Suppose the computer did not fully depreciate but still had a $250 value at the time it was replaced. Show how you would adjust the calculation given in your answer to part (a).
a. What if financing can only be had at a 10 percent interest rate? Calculate the minimum cash flow the computer must generate to be worth the purchase using your answer to part (a).

  • CreatedOctober 02, 2014
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