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S Sabre is deciding between two new printer supply contracts after its existing supplier's printers started catching...

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S

Sabre is deciding between two new printer supply contracts afterits existing supplier's printers started catching fire
Using the cash flows below ($ millions), which contract is bestbased on the NPV?
Which contract is cheaper for Sabre on an annual basis (EAA)?
Which supplier is best if Sabre plans on selling printers for theforeseeable future?
Sabre's WACC is16%
YearSupplier 1Supplier 2
0-140-190
1-110-80
2-110-80
3-110-80
4-110-80
5-80
6-80
SHOW WORK HERE, HIGHLIGHT FINAL ANSWER IN YELLOW

Answer & Explanation Solved by verified expert
3.6 Ratings (435 Votes)

NPV = PV of Cash Inflows - PV of Cash Outflows

EAA = PV of Cash Outflow / PVAF(r%, n)

Supplier 1 Supplier 2
Year PVF @16% CF Disc CF CF Disc CF
0     1.0000 $ -140.00 $ -140.00 $ -190.00 $ -190.00
1     0.8621 $ -110.00 $   -94.83 $   -80.00 $   -68.97
2     0.7432 $ -110.00 $   -81.75 $   -80.00 $   -59.45
3     0.6407 $ -110.00 $   -70.47 $   -80.00 $   -51.25
4     0.5523 $ -110.00 $   -60.75 $   -80.00 $   -44.18
5     0.4761 $   -80.00 $   -38.09
6     0.4104 $   -80.00 $   -32.84
NPV or PV of Cash outflow $ -447.80 $ -484.78
PVAF(r%,n)           2.80           3.68
EAA     -160.03     -131.56

Based on NPV, Supplier 1 is selected as it has lesser PV of Cash Outflows

Based on EAA, Supplier 2 is selected as it has lesser EAA.
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Transcribed Image Text

SSabre is deciding between two new printer supply contracts afterits existing supplier's printers started catching fireUsing the cash flows below ($ millions), which contract is bestbased on the NPV?Which contract is cheaper for Sabre on an annual basis (EAA)?Which supplier is best if Sabre plans on selling printers for theforeseeable future?Sabre's WACC is16%YearSupplier 1Supplier 20-140-1901-110-802-110-803-110-804-110-805-806-80SHOW WORK HERE, HIGHLIGHT FINAL ANSWER IN YELLOW

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