Westland College has a telephone system that is in poor condition. The system ei

Question

Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives (Ignore income taxes.): Present Proposed New System System Purchase cost new Accumulated depreciation 240,000 Overhaul costs needed now 230,000 Annual cash operating costs s 180,000 170,000 Salvage value now Salvage value at the end of 152,000165, 000 8 years Working capital required $250,000 300,000 s 160,000 200,000 Click here to view Exhibit 13B-1 and Exhibit 138-2, to determine the appropriate discount factor (s) using the tables provided. Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years The net present value of the alternative of purchasing the new system is closest to:

Explanation / Answer

Total cost of operating new equipment

Total cost of operating old equipment

2.

Cash outflow of viscera

Cash outflow of gullet

Viscera machine should be selected due to lower cash outflow

Difference = 31196 - 29634 = $1562

3.

Present value of cash outflow (PVCO)

Present value of cash inflow (PVCI)

NPV = PVCI - PVCO = 975816 - 874000= 101 816

Project should be accepted

Particulars Year Amount PV factor @ 10 % Present value purchase cost 0           300,000 1          300,000.0 Annual operating cost 1-8           170,000 5.334          906,780.0 Working capital 0           200,000 1          200,000.0 Less :Salvage value 8           165,000 0.467          (77,055.0) Less : salvage value of old machine 0         (160,000) 1        (160,000.0) Total      1,169,725.0

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