(Ignore Income Taxes in This Problem

question 154

Multiple Choice

(Ignore income taxes in this problem.) 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:
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 annual cash operating costs associated with this alternative is closest to:

• A) $(36,500)
• B) $(16,200)
• C) $(47,200)
• D) $(54,800)

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Definitions:

Long-term Debt

Loans and financial obligations lasting more than one year that a company owes to external parties.

Contingent Liability

A potential liability that may become an actual liability in the future.

Warranty Expense

Costs associated with the obligation to repair or replace a product due to defects for a specified period.

Bad Debt Expense

An expense account to record uncollectible receivables.