Question

A consulting company plans to purchase a new computer network for $125,000 to save $35,000/year over...

A consulting company plans to purchase a new computer network for $125,000 to save $35,000/year over its projected 9 year life from doing all their CAD activities in house. At the end of its life, the salvage value of this system is estimated to be $12,500. What is the rate of return of this investment (I want the actual rate) and is it a good idea if the MARR = 8%/year?

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Answer #1
Year Cashflow Discount factor@ 8% PW Discount factor@ 30 % PW
0 -125000 1.00 -125000.00 1.00 -125000
1 35000 0.93 32407.41 0.77 26923.08
2 35000 0.86 30006.86 0.59 20710.06
3 35000 0.79 27784.13 0.46 15930.81
4 35000 0.74 25726.04 0.35 12254.47
5 35000 0.68 23820.41 0.27 9426.518
6 35000 0.63 22055.94 0.21 7251.167
7 35000 0.58 20422.16 0.16 5577.821
8 35000 0.54 18909.41 0.12 4290.632
9 47500 0.50 23761.83 0.09 4479.231
IRR 24.42% NPV1 99894.19 NPV2 -18156.2

R1 = 8%

R2= 30%

NPV1 = 99894.19

NPV2 = -18156.2

IRR = R1% + NPV1*(R2-R1)%/(NPV1-NPV2)

= 0.08 + 99894.19*(0.3-0.08)/(99894.19+18156.2)

= 0.08+0.1861

= 0.2661

= 26.61%

So the rate of return of the investment is 26.61 % and it is feasible as it is greater than MARR of 8%

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