Use npv to determine whether the new system should be

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Reference no: EM13574831

Paul Services is considering the purchase of a new coputer system to replace the one in operation.

Information on the new computer system follows:

Cost	$20,000
Salvage value at the end of 5 years	$1,000
Useful life, in years	4
Annual operating costs	$4,000

Information on the computer system they now own follows:

Remaining useful life	4
Annual operating costs	$9,000
Remaining book value	$16,000
Current salvage value	$3,000
Salvage value if kept for 4 years	$1,000

The company uses the straight line method of depreciation with no mid-year convention. Their cost of capital is 7% and the tax rate is 30%.

Question:Use NPV to determine whether the new system should be purchased. Show all of the cost flows. Explain the decision-why or why not?(Some data above maybe useless)

Reference no: EM13574831

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