Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives:
| |
Present System
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New System
|
|
Purchase cost when new
|
$150,000
|
$200,000
|
|
Accumulated depreciation
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$140,000
|
|
|
Overhaul costs needed now
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$130,000
|
|
|
Annual cash operating costs
|
$80,000
|
$70,000
|
|
Salvage value now
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$60,000
|
|
|
Salvage value in 8 years
|
$52,000
|
$65,000
|
|
Working capital required
|
|
$100,000
|
Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. The working capital required under the new system would be released for use elsewhere at the conclusion of the project. Both alternatives are expected to have a useful life of eight years.
1. The net present value of overhauling the present system is:
A) $(321,084)
B) $(532,516)
C) $(560,536)
D) $(592,516)
2. The net present value of the new system alternative is:
A) $(483,095)
B) $(583,095)
C) $(596,395)
D) $(536,395)