Question

A consulting firm is considering the purchase a new computer drafting system for $120,000. It is expected this will eliminate one employee, who with benefits earns $32,000 annually. Annual operating and maintenance cost for the new system will be $4,000. The firm believes that in 7 years the system will be obsolete and have a salvage value of 10% of the first cost. Using as an annual interest rate of 10%, decide on the economic viability of the plan. Use present worth for comparison.

Answer 1

Statement of NPV
Particulars	Amount (in $)
New Computer Drafting system	-120000
Annual Cash Flow	136304
Terminal Cash Flow	6156

Since the NPV is positive, the investment in the purchase of New computer is economically viable.

W.n. 1
Annual Cash Flow
Particulars	Amount (in $)
Benefits	32000
Less: Maintanace Cost	4000
Net Benefit	28000
Present Value Factor   (7yrs, @10%)	4.868
Present Value of Benefit	136304

W.n. 2
Terminal Cashflow
Particulars	Amount (in $)
Value of Invt	120000
Salvage value	10%
Salvage value	12000
Present Value Factor   (7th yr, @10%)	0.513
Present Value of Salvage value	6156