Question

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 $2,330 and the Sony will cost $2,715. 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 $400 by the end of 3 years; they expect to sell the Sony for $345 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 $880 and for the Sony to be $1,005. Both sets can be viewed as quality units and are equally risky purchases They estimate their opportunity cost to be 9.1%. 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 S (Round to the nearest cent)

Answer 1

CNPV of Sony a)NPV of samsung PV of cash outflow 2330*1 PV of cash outflow 2715*1 2,330.00 2,715.00 PV of cash inflow 880 * PVFIA(9.1%,3) 880 2.52679 PV of cash inflow 1005 * PVFIA(9.196,4) 1005 3.23262 3,248.78 2,223.58 PV of sale value 400 * PVE(9.1%,3) NPV 400 0.77006 PV of sale value 345 * PVF(9.196,4) NPV 308.02 345*0.77006 243.51 777.30 201.60 b) ANPV-NPV/PVIFA(9.196,3) | 201.60/2.5 2679 d) ANPV-NPV/PVI FA(9.196,4) | 777.30/3.23262 | 79.79 240.45 e) Sony, as ANPV is higher. working for factors PVIFAR%,n) PVFIA(9.1%,3) PVFIA(9.1%,4) PVE(9.196,3) PVF(9.196,4) (1-(1.091A-3))/0.091 2.52679 (1-(1.091A-4))/0.091 3.23262 1/(1.091A3) 1/(1.09144) 0.77006 0.70583