A company buys a £300 computer in Year 1 and capitalizes the expenditure. The computer has a useful life of three years and an expected salvage value of £0, so the annual depreciation expense using the straight-line method is £100 per year. Compared to expensing the entire £300 immediately, the company’s pretax profit in Year1 is £200 greater.

1. Assume that the company continues to buy an identical computer each year at the same price. If the company uses the same accounting treatment for each of the computers, when does the profit-enhancing effect of capitalizing versus expensing end?

2. If the company buys another identical computer in Year 4, using the same accounting treatment as the prior years, what is the effect on Year 4 profits of capitalizing versus expensing these expenditures?