Payroll Inc If the Existing Computer System Is Kept and Used, It

Payroll Inc. Office Services is considering the purchase of a new computer system to replace the one in operation. Data on the new computer system are as follows: $$\begin{array} { l r } \text { Cost } & \$ 12,000 \\\text { Salvage value at the end of five years } & \$ 1,000 \\\text { Useful life, in years } & 5 \\\text { Annual operating cost } & \$ 4,000\end{array}$$ If the existing computer system is kept and used, it would require the purchase of additional hardware a year from now costing $2,000. After the use of the system for five years, the salvage value would be $300. Additional information on the existing system is as follows: $\begin{array}{lr}\text { Additional years of use } & 5 \\\text { Annual operating costs } & \$ 9,000 \\\text { Remaining book value } & \$ 12,000 \\\text { Current salvage value } & \$ 3,000 \\\text { Cost of capital } & 12 \%\end{array}$ The company uses the straight-line method of depreciation.
Required: Should the new system be purchased? Why or why not?

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