Question

(Ignore income taxes in this problem.) 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: Present System New System Purchase cost when new $ 150,000 $ 200,000 Accumulated depreciation $ 140,000 - Overhaul cost needed now $ 130,000 - Annual cash operating costs $ 80,000 $ 70,000 Salvage value now $ 60,000 - Salvage value in 8 years $ 52,000 $ 65,000 Working capital required - $ 100,000 Westland College uses a 10% discount rate and the total cost approach to net present value analysis. The working capital required under the new system would be released for use elsewhere at the conclusion of the project. Both alternatives are expected to have a useful life of eight years.
The net present value of overhauling the present system is closest to: Multiple Choice

($321,084)
($532,516)
($560,536)
($592,516)

Answer 1

Answer:

($560,536)

Explanation:

In order to overhaul the present system,  Westland College has to pay for the followings:

- Overhaul cost needed now $ 130,000

- Annual cash operating costs $ 80,000 in 8 years

Westland College uses a 10% discount rate, the NPV of 8 years cash operating costs is $426,794

Then the total cost is $556,794

Please see my calculation in excel attached.

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