1) Most businesses replace their computers every 2 to 3 years. Suppose that a computer costs= $2000 and that it completely depreciates in three years, at which point it has no resale value whatsoever and is thrown away.
a) If interest rate for financing equipment is equal to i, illustrate how to find out the minimum annual cash flow which a computer should make to be value the purchase. Your answer will depend on i.
b) Assume the computer didn’t completely depreciate but still had $250 value at the time it was replaced. Illustrate how you would adjust computations given in your answer to part a.
c) What if financing can only be had at a 10% interest rate? Compute the minimum cash flow computer should make to be worth purchase using your answer to part a.