ate Enterprises is a nonprofit organization that has a cost of capital of 10 per

Question

ate Enterprises is a nonprofit organization that has a cost of capital of 10 percent. The organization is considering the replacement of its computer system. The old system has a net book value of $3,000 and a remaining useful life of five years, with no expected salvage value at the end of the five years. The company estimates the system's current salvage value to be $1,500. A new computer system will cost $10,000 and is expected to have a useful life of five years, with no salvage value. Annual cash operating costs are $4,000 for the old system and $2,000 for the new system. A. What is the present value of the operating cash outflows for the old system? $ B. What is the present value of the operating cash outflows for the new system? $ C. What is the present value of the salvage value of the old system if it is replaced now? $

Explanation / Answer

A. present value of the operating cash outflows for the old system = -1500 - 4,000/1.1 - 4,000/1.1^2 - 4,000/1.1^3 -4,000/1.1^4 - 4,000/1.1^5 = -16663.15 B. present value of the operating cash outflows for the new system = -10,000 - 2,000/1.1 - 2,000/1.1^2 - 2,000/1.1^3 -2,000/1.1^4 - 2,000/1.1^5 =-17581.57 c. present value of the salvage value of the old system if it is replaced now = $1500

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