Chapter 06, Problem 069 (GO Tutorial) Galvanized Products is considering purchas

Question

Chapter 06, Problem 069 (GO Tutorial) Galvanized Products is considering purchasing a new computer system for their enterprise data management system. The vendor has quoted a purchase price of $100,000. Galvanized Products is planning to borrow one-fourth of the purchase price from a bank at 20% 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 $6,000 at that time. Over the 5-year period, Galvanized Products expects to pay a technician $24,000 per year to maintain the system but will save $51,000 per year through increased efficiencies. Galvanized Products uses a MARR of 19%/year to evaluate investments. a. What is the external rate of return of this investment? ERR = % Do all calculations to 5 decimal places and round your final answer to 2 decimal places. Tolerance is +/-2 b. What is the decision rule for judging the attractiveness of investments based on external rate of return? c. Should the new computer system be purchased? Click here to access the TVM Factor Table Calculator Please use solution approach with the positive cash flows (Rt) and negative cash flows (Ct) before netting for ERR calculation

Explanation / Answer

Solution:

Loan Amount = 100000/4= 25000

Annual Equal Installment = 25000 / PVAF(20%,3) = 11868

b) ERR should be more than MARR to make investment feasible.

c) No the computer system should not be purchased as ERR is less than MARR.

Cash Flow A B C B+C-A Yr Cash Flow Loan Technician Charges Total Outflow Savings Scrap Inflow Total Inflow FV Factor(MARR) Value at the end of year 5 1 11868 24000 35868 51000 15132 2.00534 30344.80 2 11868 24000 35868 51000 15132 1.68516 25499.84 3 11868 24000 35868 51000 15132 1.4161 21428.43 4 24000 24000 51000 27000 1.19 32130.00 5 24000 24000 51000 6000 33000 1 33000.00

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