Question

Fresh Foods is considering the purchase of a new packaging system. The system costs $50,715. The company plans to borrow three-quarters (3/4) of the purchase price from a bank at 9% per year compounded annually. The loan will be repaid using equal, annual payments over a 6-year period. The payments will be made at the end of each year for the life of the loan, with the first payment occurring at the end of year 1. The system is expected to last 19 years and have a salvage value of $23,023 at the end of its life.

Over the 19-year period, the company expects to pay $1,027 per year for maintenance. In addition, the system will require an overhaul at the end of year 7 which will cost $10,429. The system will save $4,082 per year because of efficiencies. The company uses a MARR of 4% to evaluate investments. What is the equivalent uniform annual worth (EUAW) of this system?

Enter your answer as follows: 1234

Round your answer. Do not use a dollar sign ("$"), any commas (",") or a decimal point (".").

Hints: The loan interest is at a different interest rate than our MARR. How will this impact the problem?

The remainder of the purchase price (the amount we do not take out in the form of a loan) would be considered our initial cost, at year 0

Answer 1

Initial Cost = 50,715

Company borrowed (3/4) of the purchase price from a bank at 9%

Loan is repayable equal annual payments over 6 year

Loan = 3/4th of 50,715 = 38,036.25

Cash Payment = 50,715 – 38,036.25 = 12,678.75

Loan repayment = 38,036.25 (A/P, 9%, 6)

Loan repayment = 38,036.25 (0.22292) = 8,479

Life = 19 years

Salvage Value = 23,023

Annual Maintenance = 1,027

Overhaul Cost at year 7 = 10,429

Annual Savings = 4,082

Calculate Net annual saving

Net annual savings = 4,082 – 1,027 = 3,055

MARR = 4%

Calculate EUAW

Step 1 – Calculate PW

PW = -12,678.75 – 8,479 (P/A, 4%, 6) – 10,429 (P/F, 4%, 7) + 3,055 (P/A, 4%, 19) + 23,023 (P/F, 4%, 19)

PW = -12,678.75 – 8,479 (5.24214) – 10,429 (0.75992) + 3,055 (13.13394) + 23,023 (0.47464)

PW = -14,000

Step 2 – Calculate EUAW

EUAW = -14,000 (A/P, 4%, 19)

EUAW = -14,000 (0.07614)

EUAW = -1,065.96 or -1,066

The equivalent uniform annual worth (EUAW) of this system is -1,066