Problem:
Avis Corporation currently records $4,000 of depreciation each year on the computer that it uses for its major data processing needs. The computer currently has one more year of useful life left and it will have a salvage value of zero at the end of that year. Kathy, one of the accountants at Avis, suggested that the computer be sold immediately for $3,000 and that the company hire a data processing firm to handle the corporation's data processing needs. The computer currently requires $25,000 in annual operating costs in addition to the depreciation. The data processing firm would charge $10,000 per year for its services.
Required:
If Avis decides to implement this change, what effect will this have on the corporation's net cash flow for the last year of the computer's useful life?
Select one:
- Increase of $15,000
- Increase of $18,000
- Decrease of $22,000
- Decrease of $25,000
Note: Please show how to work it out.