Question

5. (5 pts) Conduct a present worth analysis on a new piece of vision computer technology is being proposed to increase the productivity of your physical therapy facility. Your investment cost is $35,000, and the technology will have a market value of $5,000 at the end of 5 years. Your benefits are $11,000 per year with the purchase of the new vision computer technology. There is an annual subscription fee of $1,000. If your MARR is 15% per year, is this proposal a sound one? (Show work to validate your decision)

Answer 1

Answer)

The company’s minimum acceptable rate of return (MARR) is 15% per year. In order to ascertain the acceptability of proposal, the present worth of cash inflows should be compared with the present worth of cash outflows. If the Net present worth of positive, the proposal becomes acceptable.

Present worth of proposal = – Present worth of cash outflows + Present value of cash inflows                                  

                                                = - $ 35,000 + $ 36,007.50

                                                 = $ 1,007.50

Since the present worth of the proposal is positive (i.e. $ 1,007.50), it is a sound proposal.

Working Notes:

Calculation of Present worth of Net Annual cash inflow:

Net Annual cash inflow = Annual cash inflow – Annual cash outflow

                                           = ($ 11,000 - $ 1,000)

                                           = $ 10,000

Therefore net annual cash inflow is $ 10,000.

Present worth of Net cash inflow = (Annual cash inflow X Present value Annuity factor at 15% for 5 years) + (market value of computer technology at the end of 5 years X Present value factor at 15% at the end of 5 years)

                                                           = ($ 10,000 X 3.35216) + ($ 5,000 X 0.49718)

                                                           = $ 33,521.60 + $ 2,485.90

                                                           = $ 36,007.50

Therefore present worth of cash inflow is $ 36,007.50

Calculation of Present worth cash outflow:

Present worth of cash outflow = Initial investment

                                                      = $ 35,000

Therefore present worth of cash outflow is $ 35,000