Question 7 Galvanized Products is considering purchasing a new computer system f
ID: 1161659 • Letter: Q
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Question 7 Galvanized Products is considering purchasing a new computer system for their enterprise data management system. The vendor has quoted a purchase price of $90,000. Galvanized Products is planning to borrow 1/4th of the purchase price from a bank at 15.00 % compounded annually, me loan is to be repaid using equal annual payments over a 3-year period. The computer system is expected to last 5 years and has a salvage value of $4,400 at that time. Over the 5-year period, Galvanized Products expects to pay a technician $27,000 per year to maintain the system but will save $60,000 per year through increased efficiencies. Galvanized Products uses a MARR of 18.00 %/year to evaluate investments. a. What is the present worth of this investment? Do all calculations to 5 decimal places and round final answer to 2 decimal places. Tolerance is /-1.00. b. What is the decision rule for judging the attractiveness of investments based on present worth? Should the new computer system be purchased? Click here to access the TVM Factor Table CalculatorExplanation / Answer
a)
Purchase price of computer system = $90,000
Amount to be borrowed = $90,000 * ¼ = $22,500
Interest rate (r)= 12%
Term of loan (n)= 3 years
Annual loan payment = (Loan amount *r)/{1-(1+r)-n}
Annual loan payment = ($22,500*0.12)/(1-1.12-3) = $2,700/0.2882 = $9,368
The interest payment and principal portion in the loan repayment can be found by preparing a loan amortisation schedule as below:
Year
Beginning loan balance
Interest @ 12%
Loan payment
Principal
Ending loan balance
1
$ 22,500
$ 2,700
$ 9,368
$ 6,668
$ 15,832
2
$ 15,832
$ 1,900
$ 9,368
$ 7,468
$ 8,364
3
$ 8,364
$ 1,004
$ 9,368
$ 8,364
$ 0
The annual cash flows from the project can be calculated a below:
Year
0
1
2
3
4
5
Savings due to increased efficiency
$ 59,000
$ 59,000
$ 59,000
$ 59,000
$ 59,000
Technician charges
-$ 30,000
-$ 30,000
-$ 30,000
-$ 30,000
-$ 30,000
Interest payment
-$ 2,700
-$ 1,900
-$ 1,004
Net cash flow from operations
$ 26,300
$ 27,100
$ 27,996
$ 29,000
$ 29,000
Cash paid for computer system
-$ 67,500
Loan repayment
-$ 6,668
-$ 7,468
-$ 8,364
Salvage value
$ 5,000
Non operating cash flows
-$ 67,500
-$ 6,668
-$ 7,468
-$ 8,364
$ 0
$ 5,000
Net cash Inflow/(outflow)
-$ 67,500
$ 19,632
$ 19,632
$ 19,632
$ 29,000
$ 34,000
Present value at 20%
1
0.8333
0.6944
0.5787
0.4823
0.4019
Present value of cash flows
-$ 67,500.00
$ 16,359.35
$ 13,632.46
$ 11,361.04
$ 13,986.70
$ 13,664.60
$ 1,504.15
Present worth of this investment = $1,504.15
b)
If the present worth of project is positive, then the project is acceptable.
c)
Yes, new computer system should be purchased because the present worth is positive.
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