1a. You are to use the Net Present Value (NPV) to assess the following three alternative methods of paying for a new computer system which is expected to have a commercial life of eight years before replacement:
(i). Rent the system for eight years at $120,000 per annum payable annually in advance inclusive of all servicing and maintenance.
(II). Outright purchase for $500,000 with a service contract of $40,000 payable in advance. The system would have a resale value of 10% of its original purchase price at the end of its commercial life.
(iii). Hire purchase of a deposit of $150,000 and further annual payments of $100,000 inclusive of all servicing after which the company would own the system which will then worth $50,000.
Find the most economical alternative if the cost of capital is 15%.
b. A firm is considering a project with a cash outflow of $100,000 now and cash inflows of $50,000 per annum for 5 years.
(i). What is the Net Present Value of the project at a cost of capital of 10%?
(II). If a general inflation of 7% occurs and the cash inflows increase to $51,000 per annum, what is the NPV?