Answer to Question #50863 in Finance for asif

Question

A forklift will last for only 3 more years. It costs $5,000 a year to maintain. For $20,000 you can buy a new lift that can last for 10 years and should require maintenance costs of only $2,000 a year.

If the discount rate is 5 percent per year, should you replace the forklift?

What if the discount rate is 12 percent per year? Why does your answer change?

Answer 1

t = 3 years, $5,000 a year to maintain. New lift: I = $20,000, t = 10 years, costs of $2,000 a year. If the discount rate is 5 percent per year, the forklift should be replaced, if it is needed for more than 3 years. But it will not be paid back during 3 years. If the discount rate is 12 percent per year, the forklift should be replaced too.