A company is evaluating two different computer systems for purchase. The company uses a MARR of 4% to evaluate investments. The information for the two systems is in the following table:
A | B | |
First Cost | $20,000 | $10,000 |
Annual Maintenance | $5,000 | $4,000 |
Annual Cost Savings | $7,000 | $5,000 |
Salvage Value | $1,300 | $1,000 |
Expected Life | 3 years |
2 years |
Based on present worth analysis, what is the present worth of system A?
Hints:
1. What do you need to consider when evaluating multiple alternatives using present worth analysis?
2. How could you use the annual worth to easily calculate the present worth?
Based on present worth analysis, what is the present worth of system B?
Hints:
1. What do you need to consider when evaluating multiple alternatives using present worth analysis?
2. How could you use the annual worth to easily calculate the present worth?
For each system,
Net annual benefit = Annual savings - Annual maintenance cost
System A: $(7,000 - 5,000) = $2,000
System B: $(5,000 - 4,000) = $1,000
Present Worth, System A ($) = - 20,000 + 2,000 x PVIFA(4%, 3) + 1,300 x PVIF(4%, 3)
= - 20,000 + 2,000 x 2.7751 + 1,300 x 0.889 = - 20,000 + 5,550 + 1,156
= - 13,294
Present Worth, System B ($) = - 10,000 + 1,000 x PVIFA(4%, 2) + 1,000 x PVIF(4%, 2)
= - 10,000 + 1,000 x 1.8861 + 1,000 x 0.9246 = - 10,000 + 1,886 + 925
= - 7,189
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