A long-standing principle of computer innovations is that computers double in power for the same price, or, equivalently, halve in cost for the same power, even- 18 months.

Auckland Data Services (ADS) owns a single computer that is at the end of its third year of service. ADS will continue to buy computers of the same power as its current one. Its current computer would cost S80 000 to buy today, excluding installation. Given that a new model is released every 18 months, what replacement policy should ADS adopt for computers over the next three years? Other facts to be considered are:

1. Installation cost is 15% of purchase price.

2. Salvage values are computed at a declining-balance depreciation rate of 50%.

3. Annual maintenance cost is estimated as 10% of accumulated depreciation or as 15% of accumulated depreciation per 18-month period.

4. AD S uses a MARR of 12 %. 7.24 A water pump to be used by the city's maintenance department costs $10 000 new. A running-in period, costing $1000 immediately, is required for a new pump. Operating and maintenance costs average $500 the first year, increasing by $300 per year thereafter. The salvage value of the pump at any time can be estimated by the declining-balance rate of 20%. Interest is at 10%. Using a spreadsheet, calculate the EAC for replacing the pump after one year, two years, etc. How often should the pump be replaced?