Aerotron Electronics is considering the purchase of a water filtration system to assist in circuit board manufacturing. The system costs $230,000. It has an expected life of 7 years at which time its salvage value will be $7,500. Operating and maintenance expenses are estimated to be $19,000 per year.
If the filtration system is not purchased. Aerotron Electronics will have to pay Bay City $40,000 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 8% compounded annually. Aerotron Electronics' MARR is 10% compounded annually.
a. 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. The tolerance is +10.)
b. What is the decision rule for judging the attractiveness of investments based on annual worth?
c. Should Aerotron Electronics buy the water filtration system?