Question

General Motors (or Toyota) is thinking of investing in new production equipment, which will cost $150 million in year zero, and will generate cost savings of $90 million in year 1, $60 million in year 2, and $45 million 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).

Required:

a) What's the NPV of this project for General Motors?
NPV = $  million (If you get say $3.52 million, enter 3.52 not 3,520,000. If you get a negative number, enter it with a minus sign, i.e., -3.52 not (3.52))
Should GM invest, based on NPV? (1=yes, 2=no)

b) What's the NPV of this project for Toyota?
NPV = $  million
Should Toyota invest, based on NPV? (1=yes, 2=no)

Answer 1

a) Net Present Value for General Motors Net Present Value Initial Cost Cost Saving Net CashFlow Present Value Present Value Of Year Factor @25% CashFlow e-c*d b catb d a -$150.00 $0.00 $0.00 $0.00 $90.00 $60.00 -$150.00 $90.00 $60.00 -$150.00 $72.00 $38.40 1 1 0.8 2 0.64 $0.00 $45.00 $45.00 $23.04 -$17 3 0.512 Net Present Value Based on the NPV the GM should not invest in the project b) Net Present Value for Toyota Net Present Value Cost Saving Initial Cost Net CashFlow Year Present Value Of Present Value Factor @10% CashFlow b c-a+b d e c*d a -$150.00 $81.81 $49.56 -$150.00 $0.00 $0.00 $0.00 $90.00 $60.00 -$150.00 1 $90.00 $60.00 1 0.909 0.826 $0.00 $45.00 $45.00 $33.80 $15 0.751 Net Present Value Based on the NPV the Toyota should invest in the project