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 $141593. 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 $6208 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 $74289 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

Working notes:

(1) Loan amount = $141592 / 4 = $35398

(2) Annual loan repayment, years 1-3 ($) = Loan amount / P/A(10%, 3) = 35398 / 2.4869** = 14233.79

(3) Net annual benefit, years 1-3 ($) = Saving - Loan repaid - Labor cost = 74289 - 14233.79 - 20000

= 40055.21

(4) Net annual benefit, year 4 ($) = Saving - Labor cost = 74289 - 20000 = 54289

(5) Net annual benefit, year 5 ($) = 54289 + Salvage value = 54289 + 6208 = 60497

(6) First cost ($) = Purchase price - Loan amount = 141592 - 35398 = 106194

Therefore,

Present worth ($) = - 106194 + 40055.21 x P/A(12%, 3) + 54289 x P/F(12%, 4) + 60497 x P/F(12%, 5)

= - 106194 + 40055.21 x 2.4018** + 54289 x 0.6355** + 60497 x 0.5674**

= - 106194 + 96204.60 + 34500.66 + 34326

= 58837.26

~ $58837

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