A collection company has an antiquated high-capacity printer that needs to be updated. The company is faced with two alternatives: the system either can be overhauled or replaced with a new system. The following data has been gathered concerning these two alternatives (ignore income taxes).

The company uses a 10% discount rate and the total-cost approach to capital budgeting analysis. The working captial 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 ten years.

Please use excel format with formulas or explained solutions.

1. Calculate the net present value for each alternative. 2. Calculate the profitability index for each alternative. 3. Would you suggest that the company continue with one of the alternatives? If so, which alternative and why?

Transcribed Image Text:

Purchase cost when new Accumulated depreciation Overhaul costs needed now Annual cash operating costs Salvage value now Salvage value in ten years Working capital required Overhaul Present Purchase New System System $ $ $ tA $ 300,000 $ 400,000 LA 220,000 250,000 120,000 $ 90,000 30.000 $ 90,000 $ 80,000 $50.000 Purchase cost when new Accumulated depreciation Overhaul costs needed now Annual cash operating costs Salvage value now Salvage value in ten years Working capital required Overhaul Present Purchase New System System $ $ $ tA $ 300,000 $ 400,000 LA 220,000 250,000 120,000 $ 90,000 30.000 $ 90,000 $ 80,000 $50.000

Answer rating: 100% (QA)

Question 1 Present System Discounted Rate 1000 Particulars Amount Year Book Value 8000000 0 8000000 Overhaul Cost 25000000 0 25000000 Cash Operating C... View the full answer