Allen College has a telephone system that is in poor condition. The system can b

Question

Allen College has a telephone system that is in poor condition. The system can be either overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives:

Allen College uses a 12% discount rate and the total cost approach to net present value analysis. Both alternatives are expected to have a useful life of eight years.

The net present value of the alternative of overhauling the present system is closest to:

  

($232,272)

   

($108,000)

   

($238,232)

   

($228,232)

Present
System Proposed
New System Purchase cost when new $100,000 $150,000 Accumulated depreciation $90,000 - Overhaul cost needed now $80,000 - Annual cash operating costs $30,000 $20,000 Salvage value now $10,000 - Salvage value in 8 years $2,000 $15,000 Working capital required - $50,000

Explanation / Answer

Hence the correct answer is Option D i.e. ($228,232)

Minor difference in the answer value and question's option value is due to rounding off.

Present Value Factor @12%     A Cashflow B Present Value (A x B) 1.00000 ($80,000) ($80,000) 0.89286 ($30,000) ($26,786) 0.79719 ($30,000) ($23,916) 0.71178 ($30,000) ($21,353) 0.63552 ($30,000) ($19,066) 0.56743 ($30,000) ($17,023) 0.50663 ($30,000) ($15,199) 0.45235 ($30,000) ($13,570) 0.40388 ($28,000) ($11,309) Total Net Present Value ($228,221) near to ($228,232)

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

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