Question

Futuro Co. is considering purchasing a computer system to assist in circuit board manufacturing. The system costs $100,000. It has an expected life of 7 years, at which time its salvage value will be $9,500. Operating and maintenance expenses are estimated to be $2,000 per year. If the computer system is purchased, annual manufacturing costs will be reduced by $4,000 per year. Futuro co. must borrow half of the purchase price, but they cannot start repaying the loan for 3 years. The bank has agreed to three equal annual payments, with the first payment due at the end of year 3. The loan interest rate is 8% compounded annually. Futuro Co.'s MARR is 10% compounded annually. Based on the present worth analysis, should Futuro purchase the computer system? 1.

Answer 1

MARR = 10%, t = 7 yrs

Loan amount = 50000

Purchase price = 100000

Initial cost = 50000

Loan interest rate = 8%

Loan amount at the end of yr 2 = 50000*(F/P,8%,2)

Annual loan payment atarting yr 3 = 50000*(F/P,8%,2)*(A/P,8%,3)

= 50000*1.1664*0.388033 = 22630.11

PW of computer system = -50000 + (4000-2000)*(P/A,10%,7) - 22630.11*(P/A,10%,3)*(P/F,10%,2) + 9500*(P/F,10%,7)

= -50000 + 2000*4.868418 - 22630.11*2.486851*0.826446 + 9500*0.513158

= -81898.68

As NPV is negative, computer system should be rejected