Question:
(Ignore income taxes in this problem.) Morrel University has a small shuttle bus that is in poor mechanical condition. The bus can be either overhauled now or replaced with a new shuttle bus. The following data have been gathered concerning these two alternatives:
Present Bus
New Bus
Purchase cost new $30,000
$41,500
Remaining net book value
$19,000
-
Major repair needed now
$8,700
-
Annual cash operating costs
$36,000
$5,000
Salvage value now
$6,100
-
Trade-in value in eight years
$2,900
$7,900
The University could continue to use the present bus for the next eight years. Whether the present bus is used or a new bus is purchased, the bus would be traded in for another bus at the end of eight years. The University uses a discount rate of 9% and the total cost approach to net present value analysis in evaluating its investment decisions.
If the present bus is repaired, the present value of the salvage received on sale of the bus eight years from now is: