NewTech is considering a replacement for their current computer system. The current system has a salvage value now of $5000, which will fall to $4000 by the end of the year. The cost of lower productivity linked to the current computer is $3000 this year. A potential new system costs $12,000 and has the following salvage values and lost productivity for each year:

Year Salvage Lost Productivity

0 $12,000

1 9,000 $ 0

2 7,000 1000

3 5,000 2000

4 3,000 3000

NewTech uses an interest rate of 15%.

All that is available is next years marginal cost data for the defender. Therefore, we can only compare this value with the EUAC of the new computer at its minimum cost life considering a possible 4 year period.

a) Find the defenders marginal cost using this formula:

Marginal Cost = Loss in Market Value + Lost Interest + Lost Productivity,

where

Loss in Market Value is between this year and next year,

Lost Interest is based on this years salvage value, and

Lost Productivity is based on this year.

b) Find the EUAC for each of the next 4 years by completing the table below for the challenger:

Year	Market Value	Loss in Market Value	Interest in Year N	Lost Productivity	Marginal Costs	PW of Costs	EUAC
0	12000
1	9000	3000	1350	0	13350
2	7000	2000	1050	1000	11050
3	5000	2000	750	2000	9750
4	3000	2000	450	3000	8450

c) In what year, if ever, should the new system replace the current system?