Kermit is considering purchasing a new computer system. The purchase price is $1

Question

Kermit is considering purchasing a new computer system. The purchase price is $113814. 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 $7768 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 $63412 per year through increased efficiencies. Kermit uses a MARR of 12 percent to evaluate investments. What is the net present worth for this new computer system?

Explanation / Answer

75% of the machine costs = 0.75*113814 = 85,360.50 will be paid in the beginning itself

Loan amount = 25% of the machine costs = 0.25*113814 = 28453.50

Amount of 3-year annual installment = 113814 / (P/A, 10%, 3years) = 113814/2.4869 = $11,441.57

The Net present worth of the new computer system is $48,057.09

Year Machine costs Annual costs Saving Salvage Total Cashflow Present Value factor = 1.12^-year Discounted Cashflow 0    (85,360.50) (85,360.50)        1.00 (85,360.50) 1    (11,441.57) (20,000.00) 63,412.00 31,970.43        0.89 28,545.02 2    (11,441.57) (20,000.00) 63,412.00 31,970.43        0.80 25,486.63 3    (11,441.57) (20,000.00) 63,412.00 31,970.43        0.71 22,755.92 4 (20,000.00) 63,412.00 43,412.00        0.64 27,589.11 5 (20,000.00) 63,412.00 7,768.00 51,180.00        0.57 29,040.91 NPV 48,057.09

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