General Motors (or Toyota) is thinking of investing in new production equipment,

Question

General Motors (or Toyota) is thinking of investing in new production equipment, which will cost $600 million in year zero, and will generate cost savings of $360 million in year 1, $240 million in year 2, and $180 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 = $

Incorrect: Your answer is incorrect. 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))

b) What's the NPV of this project for Toyota?

NPV = $

Explanation / Answer

a) NPV of the project for General Motors at 25% discount rate = Present value of cash inflows - Present value of cash outflows = (360 x 0.800 + 240 x 0.640 + 180 x 0.512) - 600 = 533.76 - 600 = - 66.24

b) NPV of the project for Toyota at 10% discount rate= ( 360 x 0.909 + 240 x 0.826 + 180 x 0.751) - 600 = 327.24 + 198.24 + 135.18 - 600 = 60.66

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