Question
General Motors (or Toyota) is thinking of investing in new production equipment, which will cost $250million in year zero, and will generate cost savings of
General Motors (or Toyota) is thinking of investing in new production equipment, which will cost $250million in year zero, and will generate cost savings of $150million in year 1, $100million in year 2, and $75million 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).
a) What's the NPV of this project for General Motors? NPV = $
b) What's the NPV of this project for Toyota? NPV = $
c) If you computed (a) and (b) correctly, the decisions for GM and Toyota should be different. Briefly explain why they are different.
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