Question

S

Sabre is deciding between two new printer supply contracts after its existing supplier's printers started catching fire
Using the cash flows below ($ millions), which contract is best based 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 the foreseeable future?
	Sabre's WACC is	16%
Year	Supplier 1	Supplier 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 1

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.