Five years ago, the City of Paranoya spent $30,000 to purchase a computerized ra
ID: 2461473 • 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 told 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 on 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 as to which system is more desirable:
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
Machine kept for use for 10 year
a) NPV for new project totak cost will be $ 50000-$ 10000 = $ 40000
b) NPV for old project Total cost for old machine = $ 30000+$4000+$4000= $38000
b) City of paranoya should keep old system
Total outflow is $ 38000
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