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I don't understand how my textbook got NPV to be 4412.01 or where the -4,000 came from. Please Help! (BTW: I use the Texas Instruments
I don't understand how my textbook got NPV to be 4412.01 or where the -4,000 came from. Please Help! (BTW: I use the Texas Instruments BAII Plus calculator for this class)
Suppose a firm is evaluating two mutually exclusive options to meet its ongoing printing needs. The cost of capital for both options is 12%. The options are shown in Figure 11.7 and Figure 11.8. 2 3 0 F -10,000 1 + 3,500 + 6,500 6,000 Figure 11.7: Option 1 Cash Flows 2 6 0 1 H + -20,000 4,000 + 3 + 6,500 4 + 6,000 5 + 5,500 7,000 5,000 Figure 11.8: Option 2 Cash Flows Option 1 - Offset Printer: costs $10,000; life of three years; NPV = $2,577 = Option 2 Book Press: costs $20,000; life of six years; NPV = $3,245.47 Replacement Chain Approach For the replacement chain approach, you literally equalize the lives of both options by stacking projects to the least common life period. In this case, the least common life period is six years. One book press lasts six years; equivalently, two sequential purchases of the offset printer will also last six years. Essentially, you are adding projects together to force them to have the same life! Since we already know the NPV earned over the six-year life of the book press is $3,245, all we need to do is calculate the NPV of the sequential investment in two offset printers, as shown in Figure 11.9. 6 0 1 H -10,000 3,500 + 2 3 + + 6,500 6,000 -10,000 -4,000 + 3,500 5 + 6,500 6,000 NPV chained printers @ 12% = $4,412.01; IRR = 25.2%Step by Step Solution
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