Morgan Manufacturing Company is considering replacing the computer that operates its CAM system with a new model manufactured by a different company. The old CAM computer was acquired 3 years ago, has a remaining life of 5 years, and will have a sal¬

vage value of $20,000. The book value is $400,000. Straight-line depreciation with a halfyear convention is being used for tax purposes. The cash operating costs of the existing CAM computer, including software, personnel, and other supplies, total $200,000 per year.

The new CAM computer has an initial cost of $1,000,000 and will have cash operat¬

ing costs of $100,000 per year. The new CAM computer will have a life of 5 years and will have a salvage value of $200,000 at the end of the fifth year. MACRS depreciation will be used for tax purposes. If the new computer is purchased, the old one will be sold for $100,000. The company needs to decide whether to keep the old CAM computer or buy the new one. The cost of capital is 12%. The combined federal and state tax rate is 40%.

Required:

Compute the NPV of each alternative. Should the company keep the old CAM computer or buy the new one?