Question

2. Kermit is considering purchasing a new computer system. The purchase price is $107918. Kermit will borrow one-fourth of the purchase price from a bank at 10 percent per year compounded annually. The loan is to be repaid using equal annual payments over a 3-year period. The computer system is expected to last 5 years and has a salvage value of $7937 at that time. Over the 5-year period, Kermit expects to pay a technician $20,000 per year to maintain the system but will save $79161 per year through increased efficiencies. Kermit uses a MARR of 12 percent to evaluate investments. What is the net present worth for this new computer system?

Enter your answer in this format: 12345

Answer 1

The purchase price is $107918. Kermit borrows one-fourth of the purchase price from a bank at 10 percent per year compounded annually. Hence the amount borrowed is 107918/4 = 26979.50. The loan is to be repaid using equal annual payments over a 3-year period. Find the annual equivalent amount of the loan = 26979.50(A/P, 10%, 3) = 10848.86

The net present value of the system = -107918*3/4 + (79161 - 20000)(P/A, 12%, 5) - 10848.86(P/A, 12%, 3) + 7937(P/F, 12%, 5)

= -80938.50 + 59161(P/A, 12%, 5) - 10848.86(P/A, 12%, 3) + 7937(P/F, 12%, 5)

= -80938.50 + 213262.16 - 26057.13 + 4503.67

= $110770