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.

Required

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?
$

D. Would you advise the organization to replace the system?

Explanation / Answer

A. present value of the operating cash outflows for the old system = -($4,000/1.1 + $4,000/1.1^2 + $4,000/1.1^3 + $4,000/1.1^4 + $4,000/1.1^5 )= -15163.15 B. present value of the operating cash outflows for the new system = 1500 -10000 + (4000-2000)/1.1 + (4000-2000)/1.1^2 + (4000-2000)/1.1^3 + (4000-2000)/1.1^4 + (4000-2000)/1.1^5 =-918.43

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