a.
Adequate information:
Cost of new computer = $580,000
Useful life of new computer = 5 years
Pre-tax salvage value of new computer = $130,000
Saving in operating cost of new computer = $85,000
Cost of old computer = $450,000
Sale value of old computer = $230,000
Pre-tax salvage value of old computer = $60,000
Discount rate, r = 14% or 0.14
Tax rate = 21% or 0.21
To compute: Whether to replace the old computer and invest in the new computer.
Introduction: Equivalent annual cost (EAC) refers to the yearly cost of maintaining and operating assets over their life. The equivalent annual cost is useful for the company when taking capital budgeting decisions. It is helpful in the comparison of alternatives that have an unequal useful life.
b.
Adequate information:
Cost of new computer = $580,000
Useful life of new computer = 5 years
Pre-tax salvage value of new computer = $130,000
Saving in operating cost of new computer = $85,000
Cost of old computer = $450,000
Depreciation on the old computer per year = 90,000
Sale value of old computer = $230,000
Pre-tax salvage value of old computer = $60,000
Discount rate, r = 14% or 0.14
Tax rate = 21% or 0.21
To compute:
- The relevant cash flows
- Whether to replace the old computer and invest in the new computer.
Introduction:
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Chapter 6 Solutions
CORPORATE FINANCE ACCESS CARD
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EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT