Ltd. is considering replacement of its two-year old computer. Original purchase price was $4,000 with expected operating costs of $500 for the third year. A new computer costs $5,000, and will not require any maintenance in its first two years of operation.
Should the old computer be replaced if inflation is 2% per year, real interest rate is 5%, depreciation rate for the old computer is 25% and depreciation rate for the new computer is 15%?
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