Pure White Automatic Laundry must either have a complete overhaul of its current dry-cleaning system or purchase a new one. Its cost of capital is 18 percent. Pure White’s accountant has developed the following cost projections:

If Pure White keeps the old system, it will have to be overhauled immediately. With the overhaul, the old system will have a useful life of five more years.

Required

a. Use the total cost approach to evaluate the alternatives of keeping the old system and purchasing the new system. Indicate which alternative is preferred.

b. Use the differential cost approach to evaluate the desirability of purchasing the new system.

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Purchase cost (new).. Present System New System $60,000 $75,000 Remaining book value 22.500 Overhaul needed... 30,000 Annual cash operating costs 52,500 30,000 Current salvage value.. 15,000 Salvage value in 5 years.. 4,500 16,500