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.): Present BusNew BusPurchase 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 Refer to Exhibit 12B-1 and Exhibit 12B-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

Question

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

Answer 1

Answer: D