Question

Red Gerard, Inc., is considering purchasing a new computer system for their enterprise data management system. The vendor has quoted a purchase price of $200,000. RGI is planning to borrow one-fourth of the purchase price from a bank at 15% compounded annually and the loan is to be paid back over a 3-year period using equal annual payments. The computer system is expected to last 5 years and then have a salvage value of $5,000. Over this period, RGI will need to pay an IT specialist $75,000 per year to maintain the system, but expects to save $135,000 per year in increased efficiencies. RGI uses an 18% MARR. Should the system be purchased? Why or why not?

Answer 1

Find present worth of the system. We have the information

• purchase price = $200,000. Loan amount = $50000 (one-fourth of the purchase price) at 15% compounded annually for 3-year period using equal annual payments.
• Time period = 5 years, salvage value = $5,000. Payment to a specialist = $75,000 per year
• Annuual saving = $135,000 per year
• 18% MARR.

Annual payment towards loan = 50000(A/P, 15%, 3) = 50000*0.4380 = 21900.

Now PW = -150,000 - 75000(P/A, 18%, 5) - 21900(P/A, 18%, 3) + 5000(P/F, 18%, 5) + 135,000(P/A, 18%, 5)

= -150,000 - 75000*3.1272 - 21900*2.1743 + 5000*0.43711 + 135,000*3.1272

= -7800

Since PW is negative system should not be purchased.