Question

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?

Answer 1

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