Beth bought a computer 3 years ago for $3000, which she can now sell on the open
ID: 1186706 • Letter: B
Question
Beth bought a computer 3 years ago for $3000, which she can now sell on the open market for $300. The local computer shop will sell her a new system for $4000, inlcluding the new graphic software that she wanted, although, she can cope with the software that she currently owns. Her own comptuer will last 2 more years, and will then have a salvage value of zero. The new computer will have a salvage value of 300 at the end of its economic life in 5 years. The net benifets of the new computer including the graphic software have a value of 800 per year. An adiitional feature is that the computer shop will give her 500 for her old computer on a trade in.
Interest = 15%
What is the equivilent annual cost for keeping her computer?
What is the equivilent annual cost for swithcing to the new system?
What should Beth do?
Explanation / Answer
equivilent annual cost for keeping her computer is
A= 4000(i (1+i)/(1+i)^n-1) where i= 0.15 n=5
A = $ 511.69
equivilent annual cost for swithcing to the new system
A = -4000(i(1+i)/ (1+i)^n-1) +800 + (500-300)(i(1+i)/ (1+i)^n-1) + 300(i / (1+i)^n-1)
i=0.15 n=5
A = $ 196.36
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