Westland College has a telephone system that is in poor condition. The system el

Question

Westland College has a telephone system that is in poor condition. The system elther can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: Present System $150,000 $140,000 $130,000 $80,000 $60,000 $52,000 New System $200,000 Purchase cost when new Accumulated depreciation Overhaul costs needed now Annual cash operating costs Salvage value now Salvage value in 8 years Working capital required $70,000 $65,000 $100,000 Westland College uses a 10% discount rate and the total cost approach to net present value 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. Click here to view Exhibit 118-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. The net present value of overhauling the present system is closest to: O ($532,51e6) 0 ($560,536) O ($592,516) O ($321.084)

Explanation / Answer

present value of annual operating cost =PVA10%,8*Annual cost

    =5.33493*80000

    = $ 426794

present value of salvage= PVF10%,8*Salvage at and of year8

      = .46651*52000

       = $ 24259

NPV =present value -initial cost

= [-426794+24259]-130000

   = -402535-130000

   = 532535

correct option is "A" -532516 [approx to 532535 ,difference is due to decimal in present value factors]

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