(Ignore income taxes in this problem.) Allen College has a telephone system that is in poor condition. The system can be either overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives:

Allen College uses a 12% discount rate and the total cost approach to net present value analysis. Both alternatives are expected to have a useful life of eight years.
-The net present value of the alternative of replacing the present system with the proposed new system is closest to:

Question

(Ignore income taxes in this problem.) Allen College has a telephone system that is in poor condition. The system can be either overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives:

Allen College uses a 12% discount rate and the total cost approach to net present value analysis. Both alternatives are expected to have a useful life of eight years.
-The net present value of the alternative of replacing the present system with the proposed new system is closest to:

Quizplus · Accepted Answer

The net present value is calculated by subtracting the initial investment from the present value of all future cash inflows. In this case, the initial investment is $700,000 and the present value of all future cash inflows is $963,100. Therefore, the net present value is $963,100 - $700,000 = $263,100.

Based on this analysis, the proposed new system has a positive net present value, indicating that it is a profitable investment. Therefore, the best choice would be to replace the present system with the proposed new system.

(Ignore Income Taxes in This Problem