Question

Walker Systems is planning on replacing some servers that handle geological modeling. The new servers will cut down on energy costs, and improve productivity. They've contacted vendors have narrowed it down to two alternatives, IBM and HP server farms. HP IBM Initial Cost $100,000 $125,000 Annual Savings $7,500 $8,000 Annual Maintenance Cost $1000 in year one, increasing by 8% per year $500 in year one, increasing by $50 per year Product Life 4 years 6 years Resale Value $24,000 $15,000 If MARR is 8%, which server farm should they choose?

Answer 1

Computation of NPV of HP Particulars Years 2 0 3 4 Cash Outflows: Major Overhaul Annual Maintenance (100,000) (1,000) (1,080) (1,166) (1,260) Cash Inflows Annual Savings Resale Value 7,500 7,500 7,500 7,500 24,000 Net Cash Outflows A (100,000) PV factor @8% B= 1.000 Present Value (AxB) = (100,000) 6,500 0.92593 6,019 6,420 0.85734 5,504 6,334 0.79383 5,028 30,240 0.73503 22,228 Net Present Value = (61,222) Profitabilty Index = PV of future Cashflows / Initial Investment 38,778 / 100000 0.39 Computation of NPV of IBM Particulars Years 3 0 1 2 4 5 6 Cash Outflows: Major Overhaul Annual Maintenance (125,000) (500) (550) (600) (650) (700) (750) Cash Inflows Annual Savings Resale Value 8,000 8,000 8,000 8,000 8,000 8,000 15,000 Net Cash Outflows A (125,000) PV factor @ 8% B= 1.000 Present Value (AxB) = (125,000) 7,500 0.92593 6,944 7,450 0.85734 6,387 7,400 0.79383 5,874 7,350 0.73503 5,402 7,300 0.68058 4,968 22,250 0.63017 14,021 Net Present Value (81,402) Profitabilty Index = PV of future Cashflows / Initial Investment 43,598 / 125000 0.35

As the NPV and profitabilty Index (PI) of HP is favorable it should be choosen.

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