Question: Suppose we are thinking about replacing an old computer with a new one. The old one cost us $360,000; the new one will cost $730,000.

  1. Suppose we are thinking about replacing an old computer with a new one. The old one cost us $360,000; the new one will cost $730,000. The new machine will be depreciated straight-line to zero over its five-year life. It will probably be worth about $135,000 after five years. The old computer was purchased 3 years ago and is being depreciated at a rate of $72,000 per year. It is expected to last five years from now and will be worth $50,000. We can sell it for $190,000. The new machine will save us $130,000 per year in operating costs. The tax rate is 38% and the discount rate is 14%. Should we replace it?

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