Semper Mortgage wishes to select the best of three possible computers, each expected to meet the firm's growing need for computational and storage capacity.
The three computers-A, B, and C-are equally risky. The firm plans to use a 12 percent cost of capital to evaluate each of them. The initial outlay and the annual cash outflows over the life of each computer are shown in the following table.
|
Initial Outlay (CF0)
|
Computer A
$50,000
|
Computer B
$ 35,000
|
Computer C
$ 60,000
|
|
Year (t)
|
|
Cash Outflows (CFt)
|
|
|
1
|
$ 7,000
|
$ 5,500
|
$18,000
|
|
2
|
7,000
|
12,000
|
18,000
|
|
3
|
7,000
|
16,000
|
18,000
|
|
4
|
7,000
|
23,000
|
18,000
|
|
5
|
7,000
|
-
|
18,000
|
|
6
|
7,000
|
-
|
18,000
|
a. Calculate the NPV for each computer over its life. Rank the computers in descending order, based on NPV.
b. Use the equivalent annual cost (EAC) method to evaluate and rank the computers in descending order, based on the EAC.
c. Compare and contrast your findings in parts (a) and (b). Which computer would you recommend that the firm acquire? Why?