Reference no: EM13379871

Online Educators (OE), a not-for-profit firm exempt from taxes, is considering replacement of some electronic equipment associated with its distance learning (DL) facility. They spent $100,000 on the equipment 3 years ago and have depreciated it to a current book value of $40,000. Its end-of-year O&M costs are $9000 per year. Today's newer technology, including high definition digital TV, has a price tag of $125,000 and, after some negotiation, OE negotiates a price of either (1) $108,000 in cash or (2) $91,000 in cash plus the current equipment as a trade-in. OE checked around and determined it could do no better by selling the soon-to-be-obsolete equipment to someone else. OE will use a 5-year planning horizon. If the newer equipment is purchased, it will have end-of-year O&M costs of $8,000 and a salvage value of $20,000 at that time. If the old equipment is retained, it will have to be supplemented in years 3, 4, and 5 by leasing a hi-def add-on unit costing $30,000 per year payable at the beginning of the year with additional end-of-year O&M costs of $7,000. The old equipment will also have no salvage value at the end of the planning horizon. MARR is 10%.

a. What is the market value of the old equipment?

b. Use the cash flow approach (insider's viewpoint approach) to determine whether to keep or replace the current equipment.

c. What is the market value of the old equipment?

d. Use the opportunity cost approach (outsider's viewpoint approach) to determine whether to keep or replace the current equipment.