Problem - Ignore income taxes in this problem.
Five years ago, the City of Paranoya spent $30,000 to purchase a computerized radar system called W.A.S.T.E. (Watching Aliens Sent To Earth). Recently, a sales rep from W.A.S.T.E. Radar Company told the city manager about a new and improved radar system that can be purchased for $50,000. The rep also told the manager that the company would give the city $10,000 in trade on the old system. The new system will last 10 years. The old system will also last that long but only if a $4,000 upgrade is done in 5 years. The manager assembled the following information to use in the decision regarding which system is more desirable:
Old System New System
Cost of radar system $30,000 $50,000
Current salvage value $10,000 -
Salvage value in 10 years $5,000 $8,000
Annual operating costs $34,000 $29,000
Upgrade required in 5 years $4,000 -
Discount rate 14% 14%
Required: What is the City of Paranoya's net present value for the decision described above? Use the total cost approach.