a company purchases a new computer for $15000. The computer is used for 4 years

Question

a company purchases a new computer for $15000. The computer is used for 4 years and is then sold for $2000. Annual disbursements for operating, and maintaining is $3000 over a 4 year period. The computer replaced an older manual system that cost $8000/ year. On the basis of 15% MARR (i.e., reinvestment rate), determine if the decision to buy the new computer was economically sound. That is, what was the "external rate of return"?

Explanation / Answer

Cash Flows Cash flows from new computer -15000 -3000 -3000 -3000 -1000 Cash flows from old computer -8000 -8000 -8000 -8000 -8000 Incremental cash flows 7000 -5000 -5000 -5000 -7000 IRR for above investment = 64.11% IRR >MRR If the rate of return available through the incremental cash flow equals or exceeds the MARR, the alternative associated with the extra investment should be selected. decision to buy the new computer was economically sound is economically sound

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