Question

Aerotron Electronics is considering purchasing a water filtration system to assist in circuit board manufacturing. The system costs $42,000. It has an expected life of 7 years at which time its salvage value will be $9,000. Operating and maintenance expenses are estimated to be $2,000 per year. If the filtration system is not purchased, Aerotron Electronics will have to pay Bay City $14,500 per year for water purification. If the system is purchased, no water purification from Bay City will be needed. Aerotron Electronics must borrow 1/2 of the purchase price, but they cannot start repaying the loan for 2 years. The bank has agreed to 3 equal annual payments, with the 1st payment due at the end of year 2. The loan interest rate is 7.5 % compounded annually. Aerotron Electronics’ MARR is 12.0 % compounded annually.

What is the present worth of this investment?

Answer 1

To calculate the present worth of the investment, we need to find the present value of the cash inflows and outflows associated with the water filtration system.

Step-by-step explanation:

To calculate the present worth of the investment, we need to find the present value of the cash inflows and outflows associated with the water filtration system.

The cash inflows are the cost savings from not having to pay Bay City for water purification. These cost savings amount to $14,500 per year for 7 years. The cash outflows include the initial cost of the system ($42,000), the operating and maintenance expenses ($2,000 per year for 7 years), and the loan payments.

The loan payments can be calculated using the present worth formula, taking into account that the payments start at the end of year 2. After discounting all cash flows using the MARR of 12.0%, we can calculate the present worth of the investment.