Question

Question 5: Bri Drug Store is looking into the possibility of installing a 24/7 - automated prescription refill system to increase its projected revenues by $25,000 per year over the next seven years. Annual expenses to maintain the system are expected to be $6,000. The system will cost $60,000 and will have $35,000 market value at the end of the seven-year study period. Bri Drug Store's MARR is 25% per year. Use the AW method to evaluate this investment.

Answer 1

Given,

MARR = 25% per year

Increase in projected annual revenues = $25,000

Annual Expenses = -$6,000

Initial Cost of the equipment = -$60,000

From the compound interest table, we obtain (A./P, 25%, 7) = 0.3163; (A/F, 25%, 7) = 0.0663

AW of the initial cost = -$60,000 (A/P, 25%, 7) = -$60,000 x 0.3163 = -$18,978

Salvage value of the equipment at the end of 7-year period = $35,000

AW of the salvage value = $35,000 x (A/F, 25%, 7) = $35,000 x 0.0663 = $2320.5

Total Annual Worth of the given investment = Increase in projected annual Revenues + Annual Expenses + AW of the initial cost + AW of the salvage value = $25,000 - $6,000 - $18,978 + $2,320.50 = $2,342.50

As the AW of the given investment is greater than 0, the investment is viable.