Question 2 (evaluating investmentprojects)
(Chapter 11)
General Motors (or Toyota) is thinking of investing in newproduction equipment, which will cost $250 million in year zero,and will generate cost savings of $150 million in year 1, $100million in year 2, and $75 million in year 3. After 3 years, thesalvage value is zero. The cost of capital (discount rate) is 25%for General Motors and 10% for Toyota. (Due to GM's recentbankruptcy, investors are scared to lend it money, so GM has to paymuch higher interest rates to attract capital).
Required:
a) What's the NPV of this project for GeneralMotors?
NPV = $ _____ million (If you get say $3.52million, 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 forToyota?
NPV = $ _____ million
Should Toyota invest, based on NPV? (1=yes, 2=no)_____
c) If you computed (a) and (b) correctly, thedecisions for GM and Toyota should be different. Briefly explainwhy they are different.___________________________________________________________________________________________________________________________________________________________________________________________.
Question 2 (evaluating investmentprojects)
(Chapter 11)
General Motors (or Toyota) is thinking of investing in newproduction equipment, which will cost $250 million in year zero,and will generate cost savings of $150 million in year 1, $100million in year 2, and $75 million in year 3. After 3 years, thesalvage value is zero. The cost of capital (discount rate) is 25%for General Motors and 10% for Toyota. (Due to GM's recentbankruptcy, investors are scared to lend it money, so GM has to paymuch higher interest rates to attract capital).
Required:
a) What's the NPV of this project for GeneralMotors?
NPV = $ _____ million (If you get say $3.52million, 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 forToyota?
NPV = $ _____ million
Should Toyota invest, based on NPV? (1=yes, 2=no)_____
c) If you computed (a) and (b) correctly, thedecisions for GM and Toyota should be different. Briefly explainwhy they are different.___________________________________________________________________________________________________________________________________________________________________________________________.