Question

Galvanized Products is considering purchasing a new computer system for their enterprise data management system. The vendor has quoted a purchase price of $110,000. Galvanized Products is planning to borrow 1/4th of the purchase price from a bank at 15.00% 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 $4,400 at that time. Over the 5-year period, Galvanized Products expects to pay a technician $29,000 per year to maintain the system but will save $54,000 per year through increased efficiencies. Galvanized Products uses a MARR of 15.00%/year to evaluate investments. (Do all calculations to 5 decimal places and round final answer to 2 decimal places. Tolerance is +/- 1.00.) a. What is the present worth of this investment?

Answer 1

Total investment = 110000

Loan amount = 110000/4 = 27500

Net amount invested = 110000 - 27500 = 82500

Loan repayment in three years with 15% interest

Yearly Loan repayment installment = Loan amount * (A/P, 15%, 3)  

=27500 * 0.437977 = 12044.37

Years		Cash Flow (Future Value)					P/F factor	Present worth
	Investment	Loan Payment	Savings	Technician Paid	Salvage value	Net cash flow
0	-82,500.00					-82,500.00	1	-82,500.00
1		-12,044.37	54,000.00	-29,000.00		12,955.63	0.86956522	11,265.77
2		-12,044.37	54,000.00	-29,000.00		12,955.63	0.75614367	9,796.32
3		-12,044.37	54,000.00	-29,000.00		12,955.63	0.65751623	8,518.54
4			54,000.00	-29,000.00		25,000.00	0.57175325	14,293.83
5			54,000.00	-29,000.00	4,400.00	29,400.00	0.49717674	14,617.00
								-24,008.54

Net worth = -24008.54

showing formula in excel

Years		Cash Flow (Future Value)					P/F factor	Present worth
	Investment	Loan Payment	Savings	Technician Paid	Salvage value	Net cash flow
0	-82500					=V8	1	=AA8*AB8
1		-12044.366	54000	-29000		=W9+X9+Y9+Z9	=(1+0.15)^-S9	=AA9*AB9
2		-12044.366	54000	-29000		=W10+X10+Y10+Z10	=(1+0.15)^-S10	=AA10*AB10
3		-12044.366	54000	-29000		=W11+X11+Y11+Z11	=(1+0.15)^-S11	=AA11*AB11
4			54000	-29000		=W12+X12+Y12+Z12	=(1+0.15)^-S12	=AA12*AB12
5			54000	-29000	4400	=W13+X13+Y13+Z13	=(1+0.15)^-S13	=AA13*AB13
								=SUM(AC8:AC13)