Orbit Airlines is considering the purchase of a new $275,000 computerized reserv

Question

Orbit Airlines is considering the purchase of a new $275,000 computerized reservation system to replace its manual system. The new system has an estimated life of 5 years with an expected salvage value of $50,000. The new system is expected to generate cost savings of $90,000 per year in each of the 5 years. A $20,000 increase in working capital will also be needed for this new system. The working capital will be released at the end of the 5 years. Orbit

Orbit Airlines is considering the purchase of a new $275,000 computerized reservation system to replace its manual system. The new system has an estimated life of 5 years with an expected salvage value of $50,000. The new system is expected to generate cost savings of $90,000 per year in each of the 5 years. A $20,000 increase in working capital will also be needed for this new system. The working capital will be released at the end of the 5 years. Orbit's discount rate is 18%. (NOTE: The present value of $1 for 5 periods at 18% is 0.437. The present value of an annuity of $1 in arrears for 5 periods at 18% is 3.127.) What is the present value of the new reservation system? Ignore income tax considerations. $ 8,280 $ 9,440 $17,020 $28,280 $56,430

Explanation / Answer

C- $17020

P.V. = -275000 - 20000 + 90000*PVIFA(16%,5) + 50000*PVIF(16%,5) + 20000*PVIF(16%,5)
= -295000 + 90000*3.127 + 70000*0.437 = 17020

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.