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 tol 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 for 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:
a. What is the City of Paranoya's net present value for the decision described above? Use the total cost approach.
b. Should the City of Paranoya purchase the new system or keep the old system?