CompanyX is considering purchasing a new computer system. The purchase price is

Question

CompanyX is considering purchasing a new computer system. The purchase price is $100,000. CompanyX will borrow one-quarter of the purchase price from a bank at 6 percent compounded annually. The loan is to be repaid using equal annual payments over a 3-year period (payments begin one year after taking out the loan). 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, CompanyX expects to pay a technician $20,000 per year to maintain the system but will save $60,000 per year through increased efficiencies. CompanyX uses a MARR of 12 percent/year to evaluate investments. a) What is the annual loan payment amount? b) What is the present worth of this investment? c) Should the new computer system be purchased?

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Explanation / Answer

Loan amount

25000

Interest

6%

Tenure (in years)

3

Annual loan payment

-9352.75

PMT(6%,3,25000,,0)

Years

Cost own fund

Loan payment

Salavage value

Technician cost

Saving

Net cashflows

Dis factor@12%

Discounted cashflow

0

-75000

        -75,000.00

1

                      -75,000.00

1

-9352.75

-20000

60000

          30,647.25

0.892857143

                        27,363.62

2

-9352.75

-20000

60000

          30,647.25

0.797193878

                        24,431.80

3

-9352.75

-20000

60000

          30,647.25

0.711780248

                        21,814.11

4

-20000

60000

          40,000.00

0.635518078

                        25,420.72

5

6000

-20000

60000

          46,000.00

0.567426856

                        26,101.64

NPV

                        50,131.89

Decision

Accept

Loan amount

25000

Interest

6%

Tenure (in years)

3

Annual loan payment

-9352.75

PMT(6%,3,25000,,0)

Years

Cost own fund

Loan payment

Salavage value

Technician cost

Saving

Net cashflows

Dis factor@12%

Discounted cashflow

0

-75000

        -75,000.00

1

                      -75,000.00

1

-9352.75

-20000

60000

          30,647.25

0.892857143

                        27,363.62

2

-9352.75

-20000

60000

          30,647.25

0.797193878

                        24,431.80

3

-9352.75

-20000

60000

          30,647.25

0.711780248

                        21,814.11

4

-20000

60000

          40,000.00

0.635518078

                        25,420.72

5

6000

-20000

60000

          46,000.00

0.567426856

                        26,101.64

NPV

                        50,131.89

Decision

Accept

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