Question

P11-31 (similar to) Question Help O NPV and ANPV decisions Personal Finance Problem Richard and Linda Butler decide that it is time to purchase a high-definition (HD) television because the technology has improved and prices have fallen over the past 3 years. From their research, they narrow their choices to two sets, the Samsung 64-inch plasma with 1080p capability and the Sony 64-inch plasma with 1080p features. The price of the Samsung is $2,335 and the Sony will cost $2,730. They expect to keep the Samsung for 3 years, if they buy the more expensive Sony unit, they will keep the Sony for 4 years. They expect sell the Samsung for $410 by the end of 3 years, they expect to sell the Sony for $375 at the end of the year 4. Richard and Linda estimate that the end-of-year entertainment benefits (i.e., not going to movies or events and watching at home) from the Samsung to be $945 and for the Sony to be $1,000. Both sets can be viewed as quality units and are equally risky purchases. They estimate their opportunity cost to be 9.2%. The Butlers wish to choose the better alternative from a purely financial perspective. To perform this analysis they wish to do the following: a. Determine the NPV of the Samsung HD plasma TV. b. Determine the ANPV of the Samsung HD plasma TV. c. Determine the NPV of the Sony HD plasma TV. d. Determine the ANPV of the Sony HD plasma TV. e. Which set should the Butlers purchase and why? a. The NPV of the Samsung HD LCD is $ (Round to the nearest cent.) Enter your answer in the answer box and then click Check Answer. 4 parts Tremaining Clear All Check Answer

Answer 1

a. NPV of samsung hd plasma tv

Particulars	amount (in$)
Initial ouflow	2335
operationg cashflow
Profit before tax	945
Less-tax	-
Profit after tax	945
Add- depreciation	641.67
cash flow	1586.67
* Present value factor @9.2 for 3 years	2.52
Present value of cashflow	3998.41
Terminal cashflow
Salvage value	410
persent value factor at the end of 3rd year	0.77
Present value of cashflow	315.7
NPV (inflow-outflow)	1979.11

b. ANPV of samsung hd plasma

NPV/present value factor for 3 years @9.2%

= 1979.11/2.52

ANPV-= 785.36

c. NPV of Sony hd plasma tv

Particulars	amount (in$)
Initial ouflow	2730
operationg cashflow
Profit before tax	1000
Less-tax	-
Profit after tax	1000
Add- depreciation	588.75
cash flow	1588.75
* Present value factor @9.2 for 3 years	3.23
Present value of cashflow	5131.6625
Terminal cashflow
Salvage value	375
persent value factor at the end of 3rd year	0.7
Present value of cashflow	262.5
NPV (inflow-outflow)	2664.16

d. ANPV of sony hd plasma

NPV/present value factor for 4 years @9.2%

=2664.16/3.23

ANPV= 824.81

e. As per above solution sony hd plasma tv should be purchased as it has higher ANPV.