Fully depreciated digger with new model

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Reference no: EM131576227

Terra Landscaping, a partnership, must decide whether to replace an old, fully depreciated digger with a new model. The old digger needs continuously increasing maintenance to work reliably. Next year these costs are expected to be $1,500 and will increase by 50% every year thereon. Terra could sell the digger today for $4,000, and its market value will decrease by 50% per year. A new digger would cost $12,000, incur maintenance costs of $900 per year, and last for 5 years. Depreciation would be expensed straight line to zero over 5 years. After 5 years, the digger could be sold for $1,500. If the applicable tax rate is 30% and discount rate is 12%, should the digger be replaced now or in 5 years?

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Reference no: EM131576227

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