You have just started a new part-time job at Learning Solutions, a company that develops online training platforms for corporate clients and provides content support on a subscription basis. Learning Solutions is considering upgrading the computers used by its graphic design department. The five computers be- ing replaced cost $12,000 two years ago and now have a net book value of $4,000 based on using straight-line depreciation, a three-year useful life, and $0 salvage value. Your analysis indicates you can likely get about $500 per computer if you advertise them online. The new computers being considered will cost $15,000 in total and will also have a three-year useful life, with an estimated salvage value of $0. The new machines each include annual licences for graphic design software for which Learning Solutions is currently paying a total of $500 per year, per machine.

Required:

1. You prepared an analysis of the financial effects of keeping the old machines versus buying the new machines that ignored the $4,000 book value of the old machines but included the potential salvage proceeds of $500 per computer. Your supervisor has politely told you that it was a mistake to ex- clude the $4,000 since it will have to be written off for financial reporting purposes if Learning Solutions goes ahead and purchases the new computers. Your supervisor noted, "You should have included a loss of $1,500 in your analysis: the $2,500 salvage value ($500 x 5) less the $4,000 net book value to be written off." Who is correct, and why?

2. Your analysis also shows that under the option to keep the existing computers there are two oppor- tunity costs: (a) the salvage value of $500 for each of the old computers, and (b) the $500 per ma- chine in software licence cost savings that would have been realized if the new machines had been purchased. Again, your supervisor has politely told you that including these costs under the alterna- tive to keep the old machines is wrong since in neither case are there any out-of-pocket costs in- curred by Learning Solutions. Who is correct, and why?