Fresh Foods is considering the purchase of a new packaging system. The system costs $121720. The company plans to borrow three-quarters (3/4) of the purchase price from a bank at 9% per year compounded annually. The loan will be repaid using equal, annual payments over a 5-year period. The payments will be made at the end of each year for the life of the loan, with the first payment occurring at the end of year 1. The system is expected to last 15 years and have a salvage value of $13694 at the end of its life.

Over the 15-year period, the company expects to pay $956 per year for maintenance. In addition, the system will require an overhaul at the end of year 7 which will cost $10620. The system will save $2790 per year because of efficiencies. The company uses a MARR of 4% to evaluate investments. What is the equivalent uniform annual worth (EUAW) of this system?

Hints: The loan interest is at a different interest rate than our MARR. How will this impact the problem?

The remainder of the purchase price (the amount we do not take out in the form of a loan) would be considered our initial cost, at year 0

Answer rating: 100% (QA)

To calculate the Equivalent Uniform Annual Worth EUAW of the packaging system we need to consider the initial cost annual payments for the loan mainte... View the full answer