Five years ago, the City of Paranoya spent $30,000 to purchase a computerized ra
ID: 2345543 • Letter: F
Question
Five years ago, the City of Paranoya spent $30,000 to purchase a computerized radar system called W.A.S.T.E (Watching Aliens Sent To Earth). recently, a sales rep from W.A.S.T.E Radar Company tol the city manager about a new and improved radar system that can be purchased for 50,000. The rep also told the manager that the company would give the city 10,000 in trade for the old system. The new system will last 10 years. The old system will also last that long but only if a 4,000 upgrade is done in 5 years.. The manager assembled the following information to use in the decision regarding which system is more desirable:Old System / New System
Cost of Radar System 30,000 / 50,000
Current salvage value 10,000 / -
Salvage value in 10 years 5,000 / 8,000
Annual operating costs 34,000 / 29,000
Upgrade required in 5 years 4,000 / -
Discount rate 14% / 14%
Required:
a. What is the City of Paranoya's net present value for the decision described above? Use the total cost approach.
b. Should the City of Paranoya purchase the new system or keep the old system?
Explanation / Answer
amount
timing
Initial investment
-50000
0
Annual operating costs
-29000
10
Salvage of the oldage system
10000
0
Salvage of the new system
8000
npv
amount
timing
upgrade
-4000
5
Annual operating costs
-34000
10
Salvage of the old system
5000
0
NPV
purchase a computerized radar system ----- told the city manager about a new and
mpany would give the city $10,000 inonly if a $4,000 upgrade is done in 5m is more desirable
amount
timing
Initial investment
-50000
0
Annual operating costs
-29000
10
Salvage of the oldage system
10000
0
Salvage of the new system
8000
npv
amount
timing
upgrade
-4000
5
Annual operating costs
-34000
10
Salvage of the old system
5000
0
NPV
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