Kermit is considering purchasing a new computer system The p

Kermit is considering purchasing a new computer system. The purchase price is $119770. 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 $8524 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 $72048 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?

Solution

Working notes:

(1) Annual loan repayment ($) = Loan amount / PVIFA(10%, 3) = 119770 x (1/4) / 2.4869** = 12040

(2) First cost ($) = 119770 x (3/4) = 89828

(3) Net annual benefit (NAB) ($) = Annual savings - Annual cost - Loan Repaid

(4) Annual savings in year 5 ($) = 72048 + 8524 (Salvage value) = 80572

Net Present Worth (NPW) of the NAB is computed as follows.

Year	Saving ($)	Cost ($)	Loan Repaid ($)	NAB ($)	PV Factor @12%	Discounted NAB ($)
	(1)	(2)	(3)	(4)=(1)-(2)-(3)	(5)	(4)x(5)
0		89828		-89828	1.0000	-89828
1	72048	20000	12040	40008	0.8929	35721
2	72048	20000	12040	40008	0.7972	31894
3	72048	20000	12040	40008	0.7118	28477
4	72048	20000	0	52048	0.6355	33077
5	80572	20000	0	60572	0.5674	34370
					NPW ($) =	73712