Usfan Company is interested in purchasing a computer with uncertain life. The following table describes its expected life and resale value:
|
Expected life
|
Probability
|
Resale value
|
|
3 years
|
20%
|
$20,000
|
|
4 years
|
30%
|
$10,000
|
|
5 years
|
50%
|
$5,000
|
The computer will save company $40,000 annually while it is running. Usfan will depreciate it fully on the straight-line basis in three years. The tax rate of Usfan is 30%, and proper discount rate in this case is 12%. The cost of computer is $90,000. Should Usfan buy it?