9. A drug store is looking into the possibility of installing a 24/7- automated
ID: 1123247 • Letter: 9
Question
9. A drug store is looking into the possibility of installing a 24/7- automated prescription refill system to increase its projected revenues by $20,000 per year over the next five years. Annual expenses to maintain the system are expected to be $5,000. The system will cost $50,000 and will have no market value at the end of the five-year study period. The store's MARR is 20% per year. Use the AW method to evaluate this investment. a. Aw(20%)--$5,280 not good investment. b, AW(20%)--$1,720 not good investment. c, AW(20%)--$5,320 not good investment. d, AW(20%) = $5,280 good investment.Explanation / Answer
Answer :- Option b). AW (20 %) = -$ 1,720 not good investment.
Explanation :- Present worth (PW) = (20000 - 5000) * [ 1 - (1 + 0.20)-5 ] / 0.20 - 50000
= 15000 * [ 1 - (1.20)-5 ] / 0.20 - 50000
= 15000 * [ 1 - 0.4019 ] / 0.20 - 50000
= 15000 * 0.5981 / 0.20 - 50000
= 15000 * 2.9905 - 50000
= 44857.50 - 50000
= (-) 5142.50 Dollars.
Annual worth (AW) = Present worth * [ i (1 + i)T / {(1 + i)T - 1} ]
= (-) 5142.50 * [ 0.20 * (1 + 0.20)5 / {(1 + 0.20)5 - 1} ]
= (-) 5142.50 * [ 0.20 * (1.20)5 / {(1.20)5 - 1} ]
= (-) 5142.50 * [ 0.20 * 2.44832 / (2.48832 - 1) ]
= (-) 5142.50 * [ 0.497664 / 1.48832 ]
= (-) 5142.50 * 0.3344
= (-) 1719.65 (Rounded off to negative $ 1720)
Conclusion :- AW (20 %) = -$ 1,720 not a good investment. (Option b).
Note :- i denotes interest rate and T denotes time period in the years.
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