Question

Richard and Linda Butler decide that it is time to purchase a​ high-definition (HD) television because the technology has improved and prices have fallen over the past 3 years. From their​ research, they narrow their choices to two​ sets, the Samsung​ 64-inch plasma with 1080p capability and the Sony​ 64-inch plasma with 1080p features. The price of the Samsung is ​$2,375 and the Sony will cost ​$2,740. They expect to keep the Samsung for 3​ years; if they buy the more expensive Sony​ unit, they will keep the Sony for 4 years. They expect sell the Samsung for ​$405 by the end of 3​ years; they expect to sell the Sony for $365 at the end of the year 4. Richard and Linda estimate that the​ end-of-year entertainment benefits​ (i.e., not going to movies or events and watching at​ home) from the Samsung to be ​$930 and for the Sony to be ​$970 .Both sets can be viewed as quality units and are equally risky purchases. They estimate their opportunity cost to be 8.6%. The Butlers wish to choose the better alternative from a purely financial perspective. To perform this analysis they wish to do the​ following:

a. Determine the NPV of the Samsung HD plasma TV.

b. Determine the ANPV of the Samsung HD plasma TV.

c. Determine the NPV of the Sony HD plasma TV.

d. Determine the ANPV of the Sony HD plasma TV.

Answer 1

Samsung TV
period	particulars	Cashflow	PV factor @ 8.6% (1/1+i)^n)	Disc cash flow
0	Purchase price	-2375	1.0000	-2375
1	End of year benefits	930	0.9208	856
2	End of year benefits	930	0.8479	789
3	End of year benefits	930	0.7807	726
3	Residual or sale value	405	0.7807	316
	NPV		3.5494	312
	Annualised NPV = NPV/sum of PV factors		=312/(1+0.9208+0.8479+0.7807)	87.95
Sony TV
period	particulars	Cashflow	PV factor @ 8.6% (1/1+i)^n)	Disc cash flow
0	Purchase price	-2740	1.0000	-2740
1	End of year benefits	970	0.9208	893
2	End of year benefits	970	0.8479	822
3	End of year benefits	970	0.7807	757
4	End of year benefits	970	0.7189	697
4	Residual or sale value	365	0.7189	262
	NPV		4.2684	693
	Annualised NPV = NPV/sum of PV factors		=693/(1+0.9208+0.8479+0.7807+0.7189	162.29