Problem
Blossom Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra three hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing. Data for the two computers are as follows:
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Current Computer
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New Computer
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|
Original purchase cost
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$14,800
|
$24,500
|
|
Accumulated depreciation
|
$5,400
|
$0
|
|
Estimated operating costs
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$23,600
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$19,800
|
|
Useful life
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5 years
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5 years
|
If sold now, the current computer would have a salvage value of $11,200. If it is used for the remainder of its useful life, the current computer would have zero salvage value. The new computer is expected to have zero salvage value after five years.
Determine whether the current computer should be replaced. (Ignore the time value of money.)