Westland College Has a Telephone System That Is in Poor

question 50

Multiple Choice

Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives:
$\begin{array}{|l|r|r|}\hline \text { Purchase Cost New } & \begin{array}{r}\text { Present } \\\text { System }\end{array} & \begin{array}{r}\text { Proposed New } \\\text { System }\end{array} \\\hline \text { Accumulated Depreciation } & \$ 250,000 & \$ 300,000 \\\hline \text { Overhaul costs needed now } & \$ 240,000 & \\\hline \text { Annual Cash operating costs } & \$ 230,000 & \\\hline \text { Salvage value now } & \$ 180,000 & \$ 170,000 \\\hline \text { Salvage value at the end of eight years } & \$ 160,000 & \$ 165,000 \\\hline \text { Working capital required } & \$ 152,000 & \$ 200,000 \\\hline\end{array}$
Westland College uses a $10 \%$ discount rate and the total - cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. (Ignore income taxes in this problem.)
- What is the net present value of the alternative of overhauling the present system? (Do not round your intermediate calculations and round your final answer to the nearest whole number.)

• A) ($1,035,406).
• B) ($1,190,287).
• C) ($1,119,378).
• D) $717,225.

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Definitions:

Property Tax

A tax assessed on real estate by the local government, based on the property's value.

Elastic

Refers to the responsiveness of the quantity demanded or supplied of a good or service to a change in its price.

Excess Burden

The cost to society created by market inefficiency, which occurs when supply and demand are out of equilibrium.

Tax Revenue

The income that is collected by the government through various forms of taxation.