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 $119770. 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 $8524 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 $72048 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

Working notes:

(1) Annual loan repayment ($) = Loan amount / PVIFA(10%, 3) = 119770 x (1/4) / 2.4869** = 12040

(2) First cost ($) = 119770 x (3/4) = 89828

(3) Net annual benefit (NAB) ($) = Annual savings - Annual cost - Loan Repaid

(4) Annual savings in year 5 ($) = 72048 + 8524 (Salvage value) = 80572

Net Present Worth (NPW) of the NAB is computed as follows.

Year Saving ($) Cost ($) Loan Repaid ($) NAB ($) PV Factor @12% Discounted NAB ($) (1) (2) (3) (4)=(1)-(2)-(3) (5) (4)x(5) 0 89828 -89828 1.0000 -89828 1 72048 20000 12040 40008 0.8929 35721 2 72048 20000 12040 40008 0.7972 31894 3 72048 20000 12040 40008 0.7118 28477 4 72048 20000 0 52048 0.6355 33077 5 80572 20000 0 60572 0.5674 34370 NPW ($) = 73712

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