Avroland is an amusement park. It currently uses a central computer system to perform general accounting functions, including the tracking of ticket sales and payroll, as well as employee and maintenance scheduling functions. The original system, when purchased two years ago, cost $300,000 and has been depreciated for tax purposes using straight-line depreciation with an expected useful life of four more years and a zero salvage value. However, due to recent expansion, the computer system is no longer large enough. Upgrading the system to increase the storage capacity and processing speed to accommodate the extra data processing demands would cost $65,000. They system would become obsolete in four years. These system additions would also be depreciated using straight-line depreciation and would have a zero salvage value. The company’s accountant estimates that the firm will increase operating spending by $28,000 per year after taxes for data processing, payroll (including Avroland personnel), and annual updates of software for the upgraded system. Alternatively, the firm could outsource payroll to a local payroll-processing firm at the cost of $40,000 a year after taxes. This outsourcing would free up enough computer capacity to prevent having to upgrade the system. Assume a real cost of capital of 4 percent and a tax rate of 40 percent. What should Avroland do?
