Reference no: EM131545237
A university is considering upgrading its computing capabilities. The computer that is now owned was purchased 2 years ago at a cost of $500,000. It was anticipated at the time of purchase that annual operating costs would be $80,000 and that after 6 years of use the computer would be inadequate and therefore would be sold for $90,0000.
The existing unit has now a salvage value of $180,000 and if retained for 4 more years, will have a salvage value of $40,000 at the end of that time. Its operating costs will increase at a rate of 3% per year from the current value of $80,000 and it will have to be supplemented immediately with a medium-size computer having initial cost, life salvage value and operating costs of $100,000, 5 years, $30,000, and $19,000, respectively.
A new larger computer with the desired capacity can be bought for $420,000. It is estimated that it will have a service life of 5 years, final salvage value of $120,000, and operating costs of $50,000 per year.
As an alternative to these options, there is a leasing opportunity for a computer with sufficient capacity for a 4-year period. This alternative will require an initial payment of $10,000 and will have a total lease cost of $140,000 payable at the begininning of each year.
If the MARR is 12%, which is the prreferred alternative for a 4 year study period? (Current computer, New computer, Leasing option)
Show all steps and equations used, do NOT use Excel to calculate options.