HQ Department Store is considering replacement of its existing computer system. A new system has been proposed which runs faster, experiences fewer breakdowns and, as a result, promises considerable savings in operating costs. The following information on the two systems is available:

Existing SystemNew System

Original cost $300 000 $875 000

Remaining useful life 6 years 6 years

Annual cash operating costs $150 000 $8 000

Present salvage value $100 000 -

Salvage value in 6 years $25 000 $100 000

Required:

Should HQ Department Store replace the existing system? Show all calculations.