Morrel University has a small shuttle bus that is in poor mechanical condition. The bus can be either overhauled now or replaced with a new shuttle bus. The following data have been gathered concerning these two alternatives $($Ignore income taxes.$)$:

Present Bus New Bus

Purchase cost new $ $32,000$ $ $40,000$

Remaining net book value $ $21,0000$

Major repair needed now $ $9,0000$

Annual cash operating costs $ $12,000$ $ $8,000$

Salvage value now $ $10,0000$

Trade$-$in value in seven years $ $2,000$ $ $5,000$

Click here to view Exhibit $14$B$-1$ and Exhibit $14$B$-2,$ to determine the appropriate discount factor$($s$)$ using the tables provided.

The University could continue to use the present bus for the next seven years. Whether the present bus is used or a new bus is purchased, the bus would be traded in for another bus at the end of seven years. The University uses a discount rate of $12\%$ and the total cost approach to net present value analysis.

If the new bus is purchased, the present value of the annual cash operating costs associated with this alternative is closest to:

Multiple Choice

$$(54,800)$ Incorrect

$$(36,500)$

$$(16,200)$

$$(42,800)$