Replacement Decision

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

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

b. What if the discount rate is 10 percent per year? Why does your answer change?

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