Problem $42$

Intro

Facebook runs many data warehouses full of servers. Assume that each existing

server is $3$ years old and was bought for $$1,500.$ It could be sold for $$600$ now or for

$$300$ in $2$ years. The annual cost of running the server $($for electricity, cooling and

repairs$)$ is $$240.$

A new server costs $$1,400$ today and could be sold for $$175$ in $5$ years. The annual

cost of running it is $$140.$

Both types of servers are usable for $5$ years and are linearly depreciated to zero over

$5$ years.

Facebook's marginal tax rate is $34\%$ and the appropriate cost of capital for this

project is $9\%.$

Your task is to find out if Facebook should replace each server now or in two years.

Part $1$

What is the present value of all cash flows if a new server is bought once right now?

Part $2$

What is the present value of all cash flows if the old server is sold now, and the new

server is bought now and then replaced every $5$ years at the same terms?

Part $3$

What is the present value of all cash flows for the next $2$ years if the old server is

kept?

Part $4$

What is the present value of all cash flows if the server is first replaced in $2$ years,

and then every $5$ years thereafter at the same terms?