Question

Aerotron Electronics is considering the purchase of a water filtration system to assist in circuit board manufacturing. The system costs $60,000. It has an expected life of 7 years at which time its salvage value will be $7,500. Operating and maintenance expenses are estimated to be $2,000 per year. If the filtration system is not purchased, Aerotron Electronics will have to pay Bay City $12,000 per year for water purification. If the system is purchased, no water purification from Bay City will be needed. Aerotron Electronics must borrow 1/2 of the purchase price, but they cannot start repaying the loan for 2 years. The bank has agreed to three equal annual payments, with the 1st payment due at the end of year 2. The loan interest rate is 11.0% compounded annually. Aerotron Electronics’ MARR is 10% compounded annually. What is the future worth of this investment? $

Answer 1

Future worth of the investment at end of 7 years:
FW of initial cost	60000*1.1^7=	-116923
Salvage at end Yr. 7		7500
FV of O&M costs	2000*(1.1^7-1)/0.1=	-18974
FV of savings in water purification costs to Bay City	12000*(1.1^7-1)/0.1=	113846
FV of interest pmts.
at end of yr. 2	3663*1.1^5=	-5899
at end of yr. 3	2567*1.1^4=	-3758
at end of yr.4	1350*1.1^3=	-1797
Total FW of the investment		-26006
ANSWER:
Future worth of the investment at end of 7 years:		26006

Workings:

Equal annual payments from Yr. 2 to 4 on the loan=

33300/((1-1.11^-3)/0.11)=

13627

Bank Loan amortisation
Year	Annuity	Tow.int	Tow. Loan	Loan bal.
0				30000
1	0	3300	0	33300
2	13627	3663	9964	23336
3	13627	2567	11060	12276
4	13627	1350	12277	-1
Total	40881	7580	33301
		##
## $ 3300 will not be included in the total