Central Research

Central Research lab of a corporation needs to upgrade its computer facilities to increase processing capacity. The computer it uses now was bought two years ago for $650K. Annual operating costs are $80K, and the expected life is 7 years, after which the est. salvage value is $40K. The existing system has a salvage value of $180K today. One option is to supplement the existing system with a medium sized computer that would have an initial cost of $100K, operating and maintenance costs of $12K annual and a life of 5 years with salvage value of $19K. Another option is to buy a new larger system. The net initial costs, accounting or the trade-in value of the existing system would be $520K. Operating and maintenance costa would be $50K annually, its service life 5 years and its salvage value would be 120K. Still another options it lease a supplemental computer. The initial cost would be 10K and the annual lease costs which include operation and maintenance would run $45K at the beginning of each year. The company’s MARR is 12% and the study period is 5 years.
What is the best option?