Paul Services is considering the purchase of a new coputer system to replace the one in operation.
Information on the new computer system follows:
| Cost |
$20,000 |
| Salvage value at the end of 5 years |
$1,000 |
| Useful life, in years |
4 |
| Annual operating costs |
$4,000 |
Information on the computer system they now own follows:
| Remaining useful life |
4 |
| Annual operating costs |
$9,000 |
| Remaining book value |
$16,000 |
| Current salvage value |
$3,000 |
| Salvage value if kept for 4 years |
$1,000 |
The company uses the straight line method of depreciation with no mid-year convention. Their cost of capital is 7% and the tax rate is 30%.
Question:Use NPV to determine whether the new system should be purchased. Show all of the cost flows. Explain the decision-why or why not?(Some data above maybe useless)