A company’s current computer system has a salvage value now of $5,000, which wil

Question

A company’s current computer system has a salvage value now of $5,000, which will fall to $4,000 by the end of the year. The cost of the lower productivity linked to this computer system is $3,000 this year. A potential new system costs $12,000 and has the following salvage values and lost productivity for each year.

The company uses a before-tax interest rate of 10%. Should the company engineering replace its computer system this year? Why?

Year 0 1 2 3 4 Salvage Value $12,000 $9,000 $7,000 $5,000 $3,000 Lost Productivity -- $0 $1,000 $2,000 $3,000

Explanation / Answer

Ans;

The company should replace the system this year because in the current year the salvage value of old machine is 5000 so the net cost of new machine is 7000 , next year the salvage value is 4000 hence the net cost would be 8000

Also the the salvage value of the new machine reduces every year so a delay of one year would result in lower salvage value and a higher lost productivity. Hence the machine should be replaced in the current year.

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