Question

Kermit is considering purchasing a new computer system. The purchase price is $131,925. 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 $7,966 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 $61,906 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

This is all the information given

Answer 1

Answer :

Purchase price of new computer system = $131,925

Loan amount = $131,925*1/4 = $32,981.25

Calculating Loan repayment amounts below =

Payment Every Year =  $13,262.25

Total of 3 Payments = $13,262.25*3 = $39,786.75

Total Interest = $39786.75 - $32981.25 =  $6,805.50

Life of computer system = 5 years

Salvage value = $7,966

Maintenace cost per year = $20,000

Savings per year through increased efficiencies = $61,906

MARR = 12%

Calculation of Net present Worth for computer system :

Year	Net Cash Flow($)	PVF@12%	Net present worth($)
0	-131,925	-	-131,925
1	-13,262.25 - 20,000 + 61,906 = 28,643.75	0.893	25,578.87
2	-13,262.25 - 20,000 + 61,906 = 28,643.75	0.797	22,829.07
3	-13,262.25 - 20,000 + 61,906 = 28,643.75	0.712	20,394.35
4	-20,000 + 61,906 = 41,906	0.636	26,652.22
5	- 20,000 + 61,906 + 7,966 = 49,872	0.567	28,277.42
NPW			8,193.07

Net present worth = $8,193.07

= $ 8,190 (Rounded off)