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General Motors (or Toyota) is thinking of investing in new production equipment, which will cost $550 million in year zero, and will generate cost savings

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General Motors (or Toyota) is thinking of investing in new production equipment, which will cost $550 million in year zero, and will generate cost savings of $330 million in year 1, $220 million in year 2, and $165 million in year 3. After 3 years, the salvage value is zero. The cost of capital (discount rate) is 25% for General Motors and 10% for Toyota. (Due to GM's recent bankruptcy, investors are scared to lend it money, so GM has to pay much higher interest rates to attract capital). General Motors (or Toyota) is thinking of investing in new production equipment, which will cost $550 million in year zero, and will generate cost savings of $330 million in year 1, $220 million in year 2, and $165 million in year 3. After 3 years, the salvage value is zero. The cost of capital (discount rate) is 25% for General Motors and 10% for Toyota. (Due to GM's recent bankruptcy, investors are scared to lend it money, so GM has to pay much higher interest rates to attract capital)

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