Reference: 10-08
Westland College Has a Telephone System That Is

Reference: 10-08
Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | c | c | } \hline & \begin{array} { l } \text { Present } \\\text { System }\end{array} & \begin{array} { l } \text { Proposed New } \\\text { System }\end{array} \\\hline \text { Purchase cost new } & \$ 250,000 & \$ 300,000 \\\hline \text { Accumulated depreciation } & \$ 240,000 & - \\\hline \text { Overhaul costs needed now } & \$ 230,000 & - \\\hline \text { Annual cash operating costs } & \$ 180,000 & \$ 170,000 \\\hline \text { Salvage value now } & \$ 160,000 & - \\\hline \text { Salvage value at the end of 8 years } & \$ 152,000 & \$ 165,000 \\\hline \text { Working capital required } & - & \$ 200,000 \\\hline\end{array}$$ Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. The working capital required will be released in full at the end of the 8 years to be available for other purposes.
-For what reason are the net present value and internal rate of return methods of capital budgeting superior to the payback method?

A) Both the methods are easier to implement.
B) Both the methods reflect the effects of depreciation and income taxes.
C) Both the methods consider the time value of money.
D) Both the methods require less input.

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