Morrel University Has a Small Shuttle Bus That Is in Poor

question 97

Multiple Choice

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 (Ignore income taxes.) : Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided.
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.
If the present bus is repaired, the present value of the salvage received on sale of the bus seven years from now is closest to:

• A) $(2,260)
• B) $2,260
• C) $904
• D) $(904)

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Definitions:

Understated

Understated refers to financial information that is reported at a figure less than the actual value, inadvertently decreasing net income or asset values.

Replacement Cost

The current market price it would cost to replace an asset with a similar new asset.

Market Value

The present cost at which a service or asset is available for purchase or sale on an open market.

Selling Price

The amount of money for which a product or service is sold to customers, which may include discounts, promotions, or variable pricing strategies.