A Gymnasium bought a new set of exercise machines at a cost of 120,000 but it is now worth only 40,000 second hand. Net cash flows from continued use of this equipment are estimated at 25,000 for each of the remaining two years. An alternative and more advanced exercise system could be installed for 60,000 i.e. 20,000 extra, after taking account of income from selling the old system. That option would give net cash flows of 25,000 in the first year and 40,000 in the second. So you have two choices keep the old system or adopt the replacement one. The speed of innovation means that both systems will be worth nothing two years from now. Sketch (without calculation) the cash outflow and inflows for years 0,1,2 for each of the two competing options keep the old system OR buy the new system.

HINT. What is opportunity cost? Is the information on 120,000 relevant to the question? How much investment is the firm making by doing nothing i.e. just keeping the old system?