computer system

blue chip financial service is considering replacing its computer system to reduce operating costs, provide better information and allow real time access to information. the following data was obtained in respect of this project:

Current computer system:

operating staff: $80,000 per annum

rental of premises: $3000 per annum

depreciation Of current equipment: $12,000 per annum

written down value of current system: $7000

costs of developing current software: $ 16,000

scrap value of current system: $2000

other operating expenses: $20,000 per annum

proposed computer system:

cost of purchasing and installing hardware: $36,000

esitmated life of new system: 5 years

share of heard office site rental: $4000 per annum

operating staff: $75,000 per annum

cost of operating expenses: $10,000 per annum

feasibility study carried out by consultants: $6000 (NB invoice not paid)

Year 1 training cost: $3000

Year 2 training cost: $2000

Year 3 training cost: $1000

the new computer system will be located in an empty department in BCFS's head office as it does not require specialist accomodation. the existing rental agreement for the specialist accomodation that houses the current system does not expire for another two years. it is not possible to terminate this agreement or sub-let the premises prior to that date\.

BCFS's cost of capital is 10%. discount factors are as follows:

Year 1: 0.909

Year 2: 0.826

Year 3: 0.751

Year 4: 0.683

Year 5: 0.621

REQUIRED: Advise Blue Chip Financial Services in relation to the above proposal