Question

Kermit is considering purchasing a new computer system. The purchase price is $133,063. 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 $6,641 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 $61,427 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?

Answer 1

NPV = $20,040.35

Step-by-step explanation

The net present value NPV) of a project is the present value of cash inflow less the present value of cash outflow of the project.

NPV = PV of cash inflow - PV of cash outflow

We can set out the cash flows of the project using the table below:

Annual net cash inflow = Savings - Technician cost = 61,427- 20,000

= $41,427

PV of Cash flow= $41,427 × (1-(1.12^(-5))/0.12= 149,335.06

PV of salvage value = 1.12^(-5)×$6,641 = 3768.281749

NPV = 149,335.06 + 3,768.281 -133,063= 20,040.35