The following intormation covers Problems 1 to 3 A consulting company is interes
ID: 2523487 • Letter: T
Question
The following intormation covers Problems 1 to 3 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 em 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 $1,700,000 1,500,000 $1,300,000 $1,100,000 $900,000 $700,000 $500,000 Total Monthly Cost Year 2013 2014 74,100 74,000 $74,200 2015 $93,000 Problem 1: (50 Points) 1 23456 78 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
Part A:
The most economic life span is 36 months, i.e. 3 years as the machine will provide revenue throughout the three years.
Part B:
Year
Monthly revenue
Annual revenue (Monthly revenue x 12)
Average annual expected revenue
1
93200
1118400
(1118400 x 95%)= 1062480
2
94000
1128000
(1128000 x 95%) = 1071600
3
93000
1116000
(1116000 x 95)= 1060200
Part C:
Year
Monthly cost
Annual revenue (Monthly revenue x 12)
Average annual expected revenue
1
74100
889200
(889200 x 95%) =844740
2
74000
888000
(888000 x 95%) = 843600
3
74200
890400
(890400 x 95%) =845880
Part D:
Internal rate of return
Revenue of savings over the life span of the asset
3362400
Less: Overall costs
1200000
Excess of return
2162400
Part E:
Amount of loan
1200000
PV factor at year 1 to 3
2.775091
Annual instalment should be (1200000 / 2.775091)
432418.2
Workings:
Year
PV @4% pa
1
0.961538
2
0.924556
3
0.888996
PV factor at year 1 to 3
2.775091
Year
Monthly revenue
Annual revenue (Monthly revenue x 12)
Average annual expected revenue
1
93200
1118400
(1118400 x 95%)= 1062480
2
94000
1128000
(1128000 x 95%) = 1071600
3
93000
1116000
(1116000 x 95)= 1060200
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