Question 9.5: Economic Life of a Laptop Computer Determine the economic li...
Economic Life of a Laptop Computer
Determine the economic life of an $800 laptop computer. Your personal interest rate is 10% per year. Annual expenses and year-end resale values are expected to be the following:
| Year 1 | Year 2 | Year 3 | |
| Software upgrades and maintenance | $150 | $200 | $300 |
| Resale value at end of year | $600 | $450 | $200 |
The marginal cost of keeping the computer for each of the three years is as follows:
| Year 1 | Year 2 | Year 3 | |
| Upgrades and maintenance | $150 | $200 | $300 |
| Depreciation | $200 | $150 | $250 |
| Interest on capital at 10% | $80 | $60 | $45 |
| Total marginal cost | $430 | $410 | $595 |
EUAC_{1}(10%) = $430
EUAC_{2}(10%) = [$430(P/F, 10%, 1) + $410(P/F, 10%, 2)](A/P, 10%, 2) = $420
EUAC_{3}(10%) = [$420(P/A, 10%, 2) + $595(P/F, 10%, 3)](A/P, 10%, 3) = $473
Therefore, based upon economics alone, the computer should be kept for two years before being replaced. Although the differences in the EUAC_{k} (10%) values may seem small enough to make this analysis not worth the effort, consider the viewpoint of an international company that supplies its employees with laptop computers. The money saved by replacing the computer after two years (as opposed to keeping it for a third year) becomes significant when you are considering hundreds (or even thousands) of computers company wide. This also applies to the thousands of college students who need to purchase laptop computers.