Most businesses replace their computers every two to three years. Assume that a computer costs $2,000 and that it fully depreciates in 3 years, at which point it has no resale value and is thrown away.
a. If the interest rate for financing the equipment is 5 percent, what is the minimum annual cash flow that a computer must generate to be worth the purchase?
Instruction: Round your answers to the nearest dollar.
The minimum annual cash flow must be at least $.
b. Suppose the computer did not fully depreciate but still had a $250 value at the time it was replaced. What is the minimum annual cash flow that a computer must generate to be worth the purchase?
The minimum annual cash flow must be at least $.