Question

Kermit is considering purchasing a new computer system. The purchase price is $148165. 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 $6692 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 $66204 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?

Answer 1

Working notes:

(1) Loan amount ($) = 148165 / 4 = 37041.25

(2) First cost (year 0) ($) = 148165 - 37041.25 = 111123.75

(3) Annual loan repayment, years 1-3 ($) = Loan amount / P/A(10%, 3) = 37041.25 / 2.4869 = 14894.55

(4) Net cash flow (NCF) ($) = Annual savings - Technician cost - Loan repayment = 66204 - 20000 - Loan repayment

= 46204 - Loan repayment

(5) NCF in year 5 will be higher by $6692 (salvage value).

(6) Net Present Worth (NPW) of NCF is computed as follows Note that PV Factor in year N = (1.12)^-N.

Year	First Cost	Loan Repayment	NCF	PV Factor @12%	Discounted NCF
0	-111123.75		-111123.75	1.0000	-111123.75
1		14894.55	31309.45	0.8929	27954.87
2		14894.55	31309.45	0.7972	24959.70
3		14894.55	31309.45	0.7118	22285.45
4		0	46204	0.6355	29363.48
5		0	52896	0.5674	30014.61
				NPW of NCF ($) =	23454.35

Screenshot of formula: