Question

Galvanized Products is considering a new computer system for their enterprise data management system. The vendor has quoted a purchase price of $100,000. Galvanized Products is planning to borrow one-fourth of the purchase price from a bank at 15 percent compounded annually. The loan is to be repaid using equall annual payments over a 3-year period. The computer system is expected to last 5 years and has a salvage value of $5,000 at that time. Over the 5-year period, Galvanized Products expects to pay a technician $25,000 per year to maintain the system but will save $55,000 per year through increased effciencies. Galvanized Products uses a MARR of 18 percent/year to evaluate investments.
a) what is the present worth of this investment?

b) should the new computer system be purchased?

Answer 1

Galvanized Products consideration to buy  a new computer system for their enterprise data management system with the purchase price of $100,000 is being a good decision

Explanation:

Purchase value $100,000

cash on hand 75,000 + bank loan 1/4 of $100,000= $25000 =$100,000

Estimated Income                      

(increased efficiencies-payment to technician+MARR )× 5( life span )+ 5000 (salvage value )

(($55,000-$25,000=30,000)+(100,000×18÷100)=18000))×5 =$240,000+5000 = $245,000    

$((55,000-25,000=30,000)+(100,000×18÷100)=18000))×5 =240,000+5000 = 245,000$

Expected liabilities  

bank loan interest=((P*(1+i)^n) - P)=(25,000×(1+0.15)^3-25,000)= 13,022  

$bank loan interest=((P*(1+i)^n) - P)=(25,000×(1+0.15)^3-25,000)= 13,022$

Net value of the purchase proposal

 (Estimated Income - Expected liabilities) - Purchase price

     = (245,000 - 13,022) = $231,978 - $100,000 = $131,978 (profit)

  $= (245,000 - 13,022) = 231,978 - 100,000 = 131,978 (profit)$

Hence ,the Galvanized Products consideration to buy a new computer system is a good decision.