Question

Aero tron F ec ronis is cont denng the purchase of a water filtration system t assist in circuit board manu ac uring. The system costs $50,000 t has an expected e of 7 years at which time its salvage vaue will be $7,500ロperating and maintenance expenses are estimated to be $16,000 per year. If the filtration system is not purchased, Aerotran Electronics will have to pay Bay City $18,000 per year for water purificatian. If the system is purchased, no water purification from Bay City will be needed. Aerotron Flectronics must barrow 1/2 of the purchase price, but they cannot start repaying the laan for 2 years. The bank has agreed to 3 equal annual payments, with the st payment due at the end of year 2. The laan nterest ate s 8% compounded annually. Aer tron Electronics MARR s 10% compounded annually. RARR İS10,9mustborrow1/ Click here to access the TVM Factor Table Calculator What is the annual worth of this investment? carry all interim calculations to 5 decimal places and then round your final answer to the nearest dollar, te tolerance is 10. What is the dedsion rule for Judging the attractiveness of investments based on annual worth? Should Aerctron Electronics buy the water filtration system?

Answer 1

MARR = 10%

initial cost = 50000

Salvage value = 7500 after 7 yrs

annual O&M cost = 16000

If filtration system is not bought then Aerotron will pay = 18000

Annual savings if system is bought = 18000 - 16000 = 2000

Half of the cost will be loan so, loan amount = 50000/2 = 25000

Loan interest rate = 8%

Loan term = 3 yrs annual payments

Loan amouont after 1 yrs = 25000*(F/P,8%,1) = 25000*1.08 = 27000

Loan payments at EOY 2, 3, 4 = 27000*(A/P,8%,3) = 27000*0.388033 = 10476.89

PW of the investment = -25000 + 2000*(P/A,10%,7) + 7500*(P/F,10%,7) - 10476.89*(P/A,10%,3)*(P/F,10%,1)

= -25000 + 2000*4.868418 + 7500*0.513158 - 10476.89*2.486851*0.909090

= -35100.33

AW of the investment = -35100.33*(A/P,10%,7) = -35100.33*0.205405 = -7209.80 = -7210 (nearest dollar)

AW decision rule: Accept when AW > 0, otherwise reject

Aerotron should not invest in this project as AW is less than 0