Morrel University has a small shuttle bus that is in poor mechanical condition. The bus can be either overhauled now or replaced with a new shuttle bus.

Morrel University has a small shuttle bus that is in poor mechanical condition. The bus can be either overhauled now or replaced with a new shuttle bus. The following data have been gathered concerning these two alternatives:

		Present Bus	New Bus
	Purchase cost new.........................	$32,000	$40,000
	Remaining net book value.............	$21,000	—
	Major repair needed now...............	$9,000	—
	Annual cash operating costs..........	$12,000	$8,000
	Salvage value now.........................	$10,000	—
	Trade-in value in seven years........	$2,000	$5,000

The University could continue to use the present bus for the next seven years. Whether the present bus is used or a new bus is purchased, the bus would be traded in for another bus at the end of seven years. The University uses a discount rate of 12% and the total cost approach to net present value analysis in evaluating its investment decisions.

      96. If the new bus is purchased, the present value of the annual cash operating costs associated with this alternative is (rounded off to the nearest hundred dollars):

            A)      $(54,800)

            B)      $(36,500)

            C)      $(16,200)

            D)      $(42,800)

           

            Ans:  B     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  1     Level:  Easy

            Solution:

	Year(s)	Amount	12% Factor	PV
Annual cash operating costs.	1-7	($8,000)	4.564	($36,512)

      97. If the present bus is repaired, the present value of the annual cash operating costs associated with this alternative is (rounded off to the nearest hundred dollars):

            A)      $(36,500)

            B)      $(16,200)

            C)      $(47,200)

            D)      $(54,800)

           

            Ans:  D     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  1     Level:  Easy

            Solution:

	Year(s)	Amount	12% Factor	PV
Annual cash operating costs.......................................	1-7	($12,000)	4.564	($54,768)

      98. If the present bus is repaired, the present value of the salvage received on sale of the bus seven years from now is:

            A)      $(2,260)

            B)      $2,260

            C)      $904

            D)      $(904)

           

            Ans:  C     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  1     Level:  Easy

            Solution:

	Year(s)	Amount	12% Factor	PV
Salvage value.....................	7	$2,000	0.452	$904

Use the following to answer questions 99-100:

(Ignore income taxes in this problem.) Becker Billing Systems, Inc., has an antiquated high-capacity printer that needs to be upgraded. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives:

		Overhaul Present System	Purchase New System
	Purchase cost when new.............	$300,000	$400,000
	Accumulated depreciation..........	$220,000	—
	Overhaul costs needed now........	$250,000	—
	Annual cash operating costs.......	$120,000	$90,000
	Salvage value now......................	$90,000	—
	Salvage value in ten years..........	$30,000	$80,000
	Working capital required............	—	$50,000

The company uses a 10% discount rate and the total-cost approach to capital budgeting analysis. The working capital required under the new system would be released for use elsewhere at the conclusion of the project. Both alternatives are expected to have a useful life of ten years.

      99. The net present value of the overhaul alternative (rounded to the nearest hundred dollars) is:

            A)      $(750,300)

            B)      $(725,800)

            C)      $(975,800)

            D)      $(987,400)

           

            Ans:  C     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  1     Level:  Hard

            Solution:

           

	Year(s)	Amount	10% Factor	PV
Annual operating costs....	1-10	($120,000)	6.145	($737,400)
Overhaul costs.................	Now	($250,000)	1.000	(250,000)
Salvage value..................	10	$30,000	0.386	11,580
Net present value.............				($975,820)

    100. The net present value of the new system alternative (rounded to the nearest hundred dollars) is:

            A)      $(862,900)

            B)      $(552,900)

            C)      $(758,400)

            D)      $(987,400)

           

            Ans:  A     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  1     Level:  Hard

            Solution:

          

	Year(s)	Amount	10% Factor	PV
Initial investment............	Now	($400,000)	1.000	($400,000)
Annual operating costs...	1-10	($90,000)	6.145	(553,050)
Salvage value−old equip.	Now	$90,000	1.000	90,000
Salvage value.................	10	$80,000	0.386	30,880
Working capital required	Now	($50,000)	1.000	(50,000)
Working capital released	10	$50,000	0.386	19,300
Net present value............				($862,870)