Question

Westland College has a telephone system that is in poor condition. The system either can be...

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 (Ignore income taxes.):

Present System Proposed New System
Purchase cost new $ 250,000 $ 300,000
Accumulated depreciation $ 240,000 -
Overhaul costs needed now $ 230,000 -
Annual cash operating costs $ 180,000 $ 170,000
Salvage value at the end of 8 years $ 152,000 $ 165,000
Working capital required - $ 200,000

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided.

30. Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. The working capital would be released for use elsewhere when the project is completed.

The net present value of the alternative of overhauling the present system is closest to:

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Answer #1
The net present value of the alternative of overhauling the present system is closest to
Year 0 1 2 3 4 5 6 7 8
Overhaul cost needed now -230000
Annual cash operating costs -180000 -180000 -180000 -180000 -180000 -180000 -180000 -180000
Salvage value 152000
-230000 -180000 -180000 -180000 -180000 -180000 -180000 -180000 -28000
1 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467
-230000 -163620 -148680 -135180 -122940 -111780 -101520 -92340 -13076
-$1,119,136
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