Tate Enterprises is a nonprofit organization that has a cost of capital of 10 pe

Question

Tate 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. What is the present value of the operating cash outflows for the new system?

Explanation / Answer

A. Annual Cash Operating Costs for old system = 4000 Annuity factor @ 10% for 5 years = 3.79 Present Value = 4000*3.79 = 15160 (rounded) B. Similarly for new system = 2000*3.79 = 7580(rounded) C. Since salvage value has time value of 1, PV = 1500 D. Since there is savings in costs, system should be replaced. Please rate the answer as lifesaver. Thank u in advance. God Bless u :)

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