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Aerotron Electronics is considering the purchase of a water filtration system to assist in circuit board manufacturing
Aerotron Electronics is considering the purchase of a water filtration system to assist in circuit board manufacturing. The system costs $80,000. 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 $13,000 per year. If the filtration system is not purchased, Aerotron Electronics will have to pay Bay City $32,000 per year for water purification. If the system is purchased, no water purification from Bay City will be needed. Aerotron Electronics must borrow 1/2 of the purchase price, but they cannot start repaying the loan for 2 years. The bank has agreed to 3 equal annual payments, with the 1st payment due at the end of year 2. The loan interest rate is 8% compounded annually. Aerotron Electronics MARR IS 10% compounded annually. Click here to access the TVM Factor Table Calculator 32 Your answer is incorrect. Try again. TY What is the annual worth of this investment? 16927 Carry all interim calculations to 5 decimal places and then round your final answer to the nearest dollar. The tolerance is +10. Your answer is correct. What is the decision rule for judging the attractiveness of investments based on annual worthy Your answer is correct. Should Aerotron Electronics buy the water filtration system
Expert Solution
System cost =80000
If it purchse it so it would require loan of 50% of cost i.e. 40000
Cost of capital =10%
Interest on loan =8%
Repayment star at the end of 2 year in 3 equal installments.
So installment would be
Value of loan at the 1st year end =40000*1.08*1.08
=46656
Instalment =loan amount /Total of future value annuity due factor for 3 year.
=43200/2.78
=16763
So installment at the end of 2nd 3 Rd and 4 th year is 16763
Present value of installment @10%
| Installment | Pvaf | Present value(installment /pvad | |
| 16763 | (1.1)^2 | 13854 | |
| 16763 | (1.1)^3 | 12594 | |
| 16763 | (1.1)^4 | 11449 | |
| Total | 37897 |
So total cost at the year 0=(40000+37897)
=77897
Pv of salvage value =amount /(1+r)^N
=7500/(1.1)^7
=3848.68 or 3849
So net out flow = cost -pv of salvage value
=74048$
To spread equally this cost of 74048 over 7 year we devide net present cost of plan to sum of FV factor of 1-7 year
=74048/10
=15209.94 or 15210
Annual net saving in water Cost =32000
Less annual cost =. 13000
Less EAC of plant = 15210
Net annual benefit /net annual worth = 3790$
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