Kermit is considering purchasing a new computer system. The purchase price is $1
ID: 1180638 • Letter: K
Question
Kermit is considering purchasing a new computer system. The purchase price is $100,000. Kermit will borrow one-fourth of the purchase price from a bank at 10 percent per year compounded annually. The 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 $6,000 at that time. Over the 5-year period, Kermit expects to pay a technician $20,000 per year to maintain the system but will save $60,000 per year through increased efficiencies. Kermit uses a MARR of 12 percent to evaluate investments. Based on net present worth analysis, should Kermit purchase the new computer system?
Kermit is considering purchasing a new computer system. The purchase price is $100,000. Kermit will borrow one-fourth of the purchase price from a bank at 10 percent per year compounded annually. The 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 $6,000 at that time. Over the 5-year period, Kermit expects to pay a technician $20,000 per year to maintain the system but will save $60,000 per year through increased efficiencies. Kermit uses a MARR of 12 percent to evaluate investments. Based on net present worth analysis, should Kermit purchase the new computer system?
Explanation / Answer
Loan amount = 100,000/4 = 25000
Rate 10% for nper =3 yrs
So Annual Loan payment = PMT(rate,nper,pv,fv) = PMT(10%,3,25000,0) = 10052
Depreciation = (C0st-salvage)/life = (100,000-6000)/5 =18,800
Net Savings = 60000-20000 = 40000
So Net Income from Y1 to Y3 = 40000-Loan pmt -Dep = 40000-10052-18800 = $11,148
Net Inc for Y4 = 40000-Dep = 40000-18800 = 21,200
Net Inc for Y5 = 40000-Dep +salvage = 40000-18800+6000 = 27,200
So NPW = -100,000 + 11148*PVIFA(12%,3) + 21200/(1+12%)^4 + 27200/(1+12%)^5
ie NPW = -100,000 + 11148*2.4018 + 21200/(1+12%)^4 + 27200/(1+12%)^5
ie NPW = -$44,317.74
As NPW is negative, Kermit shouldn't purchase the system
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