Question

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?

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%