Online Educators (OE), a not-for-profit firm exempt from taxes, is considering replacing some electronic equipment associated with its distance learning (DL) facility. They spent \($100,000\) on the equipment 3 years ago and have depreciated it to a current book value of \($40,000.\) Its end-of-year O&M costs are \($9,000\) per year. Today’s newer technology, including high-definition digital TV, has a price tag of \($125,000,\) and after some haggling, OE negotiates a price of either (1) \($108,000\) in cash or (2) \($91,000\) in cash plus the current equipment as a trade-in. OE checked around and determined it could do no better by selling the soon-to-be-obsolete equipment to someone else.

OE will use a 5-year planning horizon. If the newer equipment is purchased, it will have end-of-year O&M costs of \($8,000\) and a salvage value of \($20,000\) at that time. If the old equipment is retained, it will have to be supplemented in years 3, 4, and 5 by leasing a hi-def add-on unit costing \($30,000\) per year payable at the beginning of the year with additional end-of-year O&M costs of \($7,000.\) The old equipment will also have no salvage value at the end of the planning horizon. MARR is 10 percent.

a. What is the market value of the old equipment using the cash flow approach (insider’s viewpoint approach) ?

b. Use the cash flow approach (insider’s viewpoint approach) to determine whether to keep or replace the current equipment. 

c. What is the market value of the old equipment using the opportunity cost approach (outsider’s viewpoint approach)?

d. Use the opportunity cost approach (outsider’s viewpoint approach) to determine whether to keep or replace the current equipment.