Kermit is considering purchasing a new computer system. The purchase price is $1
ID: 1203412 • Letter: K
Question
Kermit is considering purchasing a new computer system. The purchase price is $100949. 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 $6443 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 $76556 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? Enter your answer in this format: 12345
Explanation / Answer
Given that the Cost of the system that is currently paid is $75711.75 and $25237.25 will be paid in 3 years at 10% interest rate compounded annually. First find the NPV of this loan amount.
P(A/P, 10%, 3)
= 25237.25(0.4021)
=$10147.90
Now this the annual cost which becomes $30443.70 in total and this has to be disbursed over 5 year period using MARR at 12% which suggests us to find the NPV of $30443.70.
P(P/F, 12%, 5)
= 30443.7(0.5674)
= $17273.75
With salvage value 6443, maintenance cost is $20000 per year and annual savings $76556, the solution is reached as:
NPV of costs = $75711.75 + $17273.75 + 20000(P/A, 12%, 5)
= 92985 + 20000(3.605) or 72100
= $165,085
NPV of benefits = 76556(P/A, 12%, 5) + 6443(P/F, 12%, 5)
= $275984 + $3655
= $279640 (approx)
NPW of the system = $279640 - $165,085 = $114,555.
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