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Unfortunately, Obsolete Technologies business is shrinking as the company dithers and dawdles. Its chief financial...

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Finance

imageUnfortunately, Obsolete Technologies business is shrinking as the company dithers and dawdles. Its chief financial officer realizes that the savings from installing the new computer will likewise shrink by $4,000 per year, from a present value of $70,000 now, to $66,000 next year, then to $62,000, and so on. Redo Table 8.2with this new information. When should Obsolete buy the new computer?

Year of Purchase

Cost of Computer PV Savings

NPV at Year of Purchase ( r = 10%) NPV Today 0 $50 $70 $20 $20.0 1 45 70 25 22.7 2 40 70 30 24.8 3 36 70 34 25.5 optimal purchase date 4 33 70 37 25.3 5 31 70 39 24.2 TABLE

TABLE 8.2 Obsolete Technologies: The gain from purchase of a computer is rising, but the NPV today is highest if the computer is purchased in year 3 (dollar values in thousands) Year of Purchase Cost of Computer $50 45 40 36 Pv Savings $70 70 70 70 70 70 NPV at Year of Purchase (r-10%) $20 25 30 34 37 39 NPV Today $20.0 22.7 24.8 25.5 25.3 24.2 2 3 4 optimal purchase date 31

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