Question
A owner of a company are considering updating all of his computers to new models. Using the old computers will have a net cash flows
A owner of a company are considering updating all of his computers to new models. Using the old computers will have a net cash flows of $89,365 per year and it is estimated that with the new computers net cash flows would grow to $120,643 per year. Updating all of the computers would initially cost $156,836. The estimated remaining life of the old computers is 1 year and the expected lifetime of the new computers is 3 years. The scrap value of the old computers is estimated to be $16,086 irrespective of whether they are scrapped today or in 1 year. The new computers have an estimated scrap value at the end of their life of $20,912.
He has two different options:
Option 1: Use the old computers for 1 more year and then replace them with the new computers that will then be replaced every 3 years in perpetuity.
Option 2: Replace the old computers with the new computers now and replace them every 3 years in perpetuity.
The company's required rate of return is 14.7% pa. Assume that the cost of the computers, the cash flows that they generate and their scrap value remain constant over time.
What is the NPV for option 1 ?
What is the NPV for option 2 ?
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