Mindsweep, a non-profit organization, has some excess cash and is considering the replacement of their computer system. The old computer has a book value of $1,500 and can be sold presently for the same amount. It could also be used for another five years at which point it will have zero salvage value. The annual cash operating costs of the old computer is $4,000. The company uses straight-line depreciation method.
The new computer will cost $10,000 and has an estimated life of five years with no salvage value. The annual cash operating costs of the new computer will only be $1,900. As a non-profit organization, Mindsweep is tax exempt. If Mindsweep chose not to replace the computer system, they will invest the excess cash in a 6% tax-free municipal bond.
Draw a time line of the cash flows.
What is the NPV of replacing the computer? ___________________
The solution explains how to draw a time line and calculate the net present value