The following information covers Problems 1 to3 A consulting company is interest
ID: 2523069 • Letter: T
Question
The following information covers Problems 1 to3 A consulting company is interested in buying a new complete computer system with printers, plotters and servers. The purchased price is $1,200,000 and a life span that minimizes the EUAC. The salvage price of the complete computer m is $300,415 The revenue/saving and cost information based on previous records for a similar company is as follows: Monthly Saving/Revenue $93,200 $94,000 $93,000 Total Monthly Cost $74,100 $74,000 $74,200 $1,700,000 Year 2013 2014 2015 $1,500,000 $1,300,000 $1,100,000 $900,000 $700,000 $500,000 Problem 1: (50 Points) A) Determine the most economical life span B) Determine the average annual expected revenue with a certainty of 95% C) Determine the average annual expected cost with a certainty of 95% D) Determine the internal rate of return for this computer system E) If the company does not have funds to purchase the computer system, determine the equal annual payment of the loan based on a 4% interest rateExplanation / Answer
STEP:1 Determinig most economical life span value in ($)
Cost of a computer = 1200000
Less: Solvage value = (300415)
useful value of computers = 899585
most economical life span = $899585/$200000 = 4years 6months
Note: Based on $200000 straight line value of depreciation in a diagram economical life span of 1200000 cost of computers are identified.
STEP:2 Determinig average annual expected revenue with certanty of 95%
Particulars 2013 2014 2015
1.Annual savings 93200 94000 93000
Less:Annual cost (74100) (74000) (74200)
Annual profits 19100 20000 18800
Average rate of return on investments = Average annual profits / Average investments
average profits = 19100+20000+18800/3years = 45366.67
average investments = 74100+74000+74200/3years = 172833.33
= 45366.67/172833.33*100 = 26%
Year annual investments average rate of return ARR probability average expected return
2013 74100 26% 19266 95% (19266*95%) = 18302.7
2014 74000 26% 19240 95% (19240*95%) = 18278
2015 74200 26% 19292 95% (19292*95%) = 18327.4
Total average annual return 54908.1
STEP3:Determining average annual expected cost with certainty of 95%
Total average annual cost = 172833.33
Expected annual average cost at probability of 95% = 172833.33*95% =164191.66
STEP:4Determinig internal rate of return
Particulars 2013 2014 2015
1.cash inflows 93200 94000 93000
2.Present value factors@5% discount 0.9524 0.9070 0.8638
(1/(1+r)whole power n)
3.present value of cash flows(A) 88764 85258 80333 =Total 254355
4.present value of cash outflows(B) 74100 74000 74200 =Total 222300
5.Net present value (A-B) = 32055
Particulars 2013 2014 2015
1.cash inflows 93200 94000 93000
2.Present value factors@26% discount .7937 0.6299 0.4999
(1/(1+r)whole power n)
3.present value of cash flows(A) 73973 59211 46491 =Total 179675
4.present value of cash outflows(B) 74100 74000 74200 =Total 222300
5.Net present value (A-B) = (42625)
calculation of IRR = 5+ 32055/32055-(42625)*21% =14.01%(APPROX)
STEP:5 Determinig of equal annual payments @4% interest rate
annual present value factor for 3 years @4% rate = 0.9615+0.9246+0.8890 =2.7751
Initial investment /Annual present value factor = annual equal payment
= $1200000-$300415/207751 = $324163 per annum
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