Question
Alice is considering the purchase of a $500,000 computer with an economic life of five years. The computer will be fully depreciated over five years
Alice is considering the purchase of a $500,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line method. The market value of the computer will be zero in five years. The computer will replace five office employees whose combined annual salaries are $120,000. The computer will also immediately lower the firm's required net working capital by $100,000. This amount of net working capital will be needed again once the computer is out of service five years later. The corporate tax rate is 34 percent. Is it worthwhile to buy the computer if the appropriate discount rate is 12 percent?
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