Ross7eCh07Net_Present_Value_and_Capital_Budgeting(公司理财_罗斯_第七版)zge

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McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.CHAPTER7Net Present Valueand Capital Budgeting0McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.ChapterOutline7.1IncrementalCashFlows7.2TheBaldwinCompany:AnExample7.3TheBoeing777:AReal-WorldExample7.4InflationandCapitalBudgeting7.5InvestmentsofUnequalLives:TheEquivalentAnnualCostMethod7.6SummaryandConclusions1McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.7.1IncrementalCashFlowsCashflowsmatternotaccountingearnings.Sunkcostsdontmatter.Incrementalcashflowsmatter.Opportunitycostsmatter.Sideeffectslikesynergyanderosionmatter.Taxesmatter:wewantincrementalafter-taxcashflows.Inflationmatters.2McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.CashFlowsNotAccountingEarningsConsiderdepreciationexpense.Youneverwriteacheckmadeoutto“depreciation”.Muchoftheworkinevaluatingaprojectliesintakingaccountingnumbersandgeneratingcashflows.3McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.IncrementalCashFlowsSunkcostsOpportunitycostsdomatter.JustbecauseaprojecthasapositiveNPVthatdoesnotmeanthatitshouldalsohaveautomaticacceptance.SpecificallyifanotherprojectwithahigherNPVwouldhavetobepassedupweshouldnotproceed.4McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.IncrementalCashFlowsSideeffectsmatter.Erosion(Ifournewproductcausesexistingcustomerstodemandlessofcurrentproducts,weneedtorecognizethat.)Synergy5McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.EstimatingCashFlowsCashFlowsfromOperationsRecallthat:OperatingCashFlow=EBITTaxes+DepreciationNetCapitalSpendingDontforgetsalvagevalue(aftertax,ofcourse).6McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.InterestExpenseLaterchapterswilldealwiththeimpactthattheamountofdebtthatafirmhasinitscapitalstructurehasonfirmvalue.Fornow,itsenoughtoassumethatthefirmslevelofdebt(henceinterestexpense)isindependentoftheprojectathand.7McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.7.2TheBaldwinCompany:AnExampleCostsoftestmarketing(alreadyspent):$250,000.Currentmarketvalueofproposedfactorysite(whichweown):$150,000.Costofbowlingballmachine:$100,000(depreciatedaccordingtoACRS5-yearlife).Increaseinnetworkingcapital:$10,000.Production(inunits)byyearduring5-yearlifeofthemachine:5,000,8,000,12,000,10,000,6,000.Priceduringfirstyearis$20;priceincreases2%peryearthereafter.Productioncostsduringfirstyearare$10perunitandincrease10%peryearthereafter.Annualinflationrate:5%WorkingCapital:initially$10,000changeswithsales.8McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.TheWorksheetforCashFlowsoftheBaldwinCompanyYear 0Year 1Year 2Year 3Year 4 Year 5 Investments:(1)Bowlingballmachine100.0021.76*(2)Accumulated20.0052.0071.2082.7294.24depreciation(3)Adjustedbasisof80.00 48.0028.8017.285.76machineafterdepreciation(endofyear)(4)Opportunitycost150.00150.00(warehouse)(5)Networkingcapital10.00 10.0016.3224.9721.220(endofyear)(6)Changeinnet10.006.328.653.7521.22workingcapital(7)Totalcashflowof260.006.328.653.75192.98investment(1)+(4)+(6)*Weassumethattheendingmarketvalueofthecapitalinvestmentatyear5is$30,000.Capitalgainisthedifferencebetweenendingmarketvalueandadjustedbasisofthemachine.Theadjustedbasisistheoriginalpurchasepriceofthemachinelessdepreciation.Thecapitalgainis$24,240(=$30,000$5,760).WewillassumetheincrementalcorporatetaxforBaldwinonthisprojectis34percent.Capitalgainsarenowtaxedattheordinaryincomerate,sothecapitalgainstaxdueis$8,2400.34($30,000$5,760).Theafter-taxsalvagevalueis$30,0000.34($30,000$5,760)=21,760.($thousands)(Allcashflowsoccurattheendoftheyear.)9McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.TheWorksheetforCashFlowsoftheBaldwinCompany($thousands)(Allcashflowsoccurattheendoftheyear.)Year 0Year 1Year 2Year 3Year 4 Year 5 Investments:(1)Bowlingballmachine100.0021.76*(2)Accumulated20.0052.0071.2082.7294.24depreciation(3)Adjustedbasisof80.0048.0028.8017.285.76machineafterdepreciation(endofyear)(4)Opportunitycost150.00150.00(warehouse)(5)Networkingcapital10.00 10.0016.3224.9721.220(endofyear)(6)Changeinnet10.006.328.653.7521.22workingcapital(7)Totalcashflowof260.006.328.653.75192.98investment(1)+(4)+(6)150Attheendoftheproject,thewarehouseisunencumbered,sowecansellitifwewantto.10McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.TheWorksheetforCashFlowsoftheBaldwinCompany(continued)Year 0Year 1Year 2Year 3Year 4 Year 5Income:(8)SalesRevenues100.00163.00249.72212.20129.90($thousands)(Allcashflowsoccurattheendoftheyear.)Recallthatproduction(inunits)byyearduring5-yearlifeofthemachineisgivenby:(5,000,8,000,12,000,10,000,6,000).Priceduringfirstyearis$20andincreases2%peryearthereafter.Salesrevenueinyear3=12,000$20(1.02)2=12,000$20.81=$249,720.11McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.TheWorksheetforCashFlowsoftheBaldwinCompany(continued)Year 0Year 1Year 2Year 3Year 4 Year 5Income:(8)SalesRevenues100.00163.00249.72212.20129.90(9)Operatingcosts50.0088.00145.20133.1087.84($thousands)(Allcashflowsoccurattheendoftheyear.)Again,production(inunits)byyearduring5-yearlifeofthemachineisgivenby:(5,000,8,000,12,000,10,000,6,000).Productioncostsduringfirstyear(perunit)are$10and(increase10%peryearthereafter).Productioncostsinyear2=8,000$10(1.10)1=$88,00012McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.TheWorksheetforCashFlowsoftheBaldwinCompany(continued)Year 0Year 1Year 2Year 3Year 4 Year 5Income:(8)SalesRevenues100.00163.00249.72212.20129.90(9)Operatingcosts50.0088.00145.20133.1087.84(10)Depreciation20.0032.0019.2011.5211.52($thousands)(Allcashflowsoccurattheendoftheyear.)DepreciationiscalculatedusingtheAcceleratedCostRecoverySystem(shownatright)Ourcostbasisis$100,000Depreciationchargeinyear4=$100,000(.1152)=$11,520.YearACRS%120.00%232.00%319.20%411.52%511.52%65.76%Total 100.00%13McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.TheWorksheetforCashFlowsoftheBaldwinCompany(continued)Year 0Year 1Year 2Year 3Year 4 Year 5Income:(8)SalesRevenues100.00163.00249.72212.20129.90(9)Operatingcosts50.0088.00145.20133.1087.84(10)Depreciation20.0032.0019.2011.5211.52(11)Incomebeforetaxes30.0043.2085.3267.5830.54(8)(9)-(10)(12)Taxat34percent10.20 14.6929.0122.9810.38(13)NetIncome19.80 28.5156.3144.6020.16($thousands)(Allcashflowsoccurattheendoftheyear.)14McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.IncrementalAfterTaxCashFlowsoftheBaldwinCompanyYear 0Year 1Year 2Year 3Year 4Year 5(1)SalesRevenues$100.00$163.00$249.72$212.20$129.90(2)Operatingcosts-50.00-88.00-145.20133.10-87.84(3)Taxes-10.20-14.69-29.01-22.98-10.38(4)OCF(1)(2)(3)39.8060.5175.5156.1231.68(5)TotalCFofInvestment260.6.328.653.75192.98(6)IATCF(4)+(5)260.39.8054.1966.8659.87224.6605.588,51$)10.1(66.224$)10.1(87.59$)10.1(86.66$)10.1(19.54$)10.1(80.39$260$5432=+-=NPVNPV15McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.NPVBaldwinCompany139.8051,588.05260CF1F1CF0INPV10154.19CF2F2166.86CF3F3159.87CF4F41224.66CF5F516McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.7.3InflationandCapitalBudgetingInflationisanimportantfactofeconomiclifeandmustbeconsideredincapitalbudgeting.Considertherelationshipbetweeninterestratesandinflation,oftenreferredtoastheFisherrelationship:(1+NominalRate)=(1+RealRate)(1+InflationRate)Forlowratesofinflation,thisisoftenapproximatedasRealRateNominalRateInflationRateWhilethenominalrateintheU.S.hasfluctuatedwithinflation,mostofthetimetherealratehasexhibitedfarlessvariancethanthenominalrate.Whenaccountingforinflationincapitalbudgeting,onemustcomparerealcashflowsdiscountedatrealratesornominalcashflowsdiscountedatnominalrates.17McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.ExampleofCapitalBudgetingunderInflationSonyInternationalhasaninvestmentopportunitytoproduceanewstereocolorTV.TherequiredinvestmentonJanuary1ofthisyearis$32million.Thefirmwilldepreciatetheinvestmenttozerousingthestraight-linemethod.Thefirmisinthe34%taxbracket.ThepriceoftheproductonJanuary1willbe$400perunit.Thepricewillstayconstantinrealterms.Laborcostswillbe$15perhouronJanuary1.Thewillincreaseat2%peryearinrealterms.Energycostswillbe$5perTV;theywillincrease3%peryearinrealterms.Theinflationrateis5%Revenuesarereceivedandcostsarepaidatyear-end.18McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.ExampleofCapitalBudgetingunderInflationTherisklessnominaldiscountrateis4%.Therealdiscountrateforcostsandrevenuesis8%.CalculatetheNPV.Year1Year2Year3Year4PhysicalProduction(units)100,000200,000200,000150,000LaborInput(hours)2,000,0002,000,0002,000,0002,000,000Energyinput,physicalunits200,000200,000200,000200,00019McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.CF0ExampleofCapitalBudgetingunderInflationThedepreciationtaxshieldisarisk-freenominalcashflow,andisthereforediscountedatthenominalrisklessrate.Costofinvestmenttoday=$32,000,000Projectlife=4yearsAnnualdepreciationexpense:Depreciationtaxshield=$8,000,000.34=$2,720,00042,720,0000CF1F19,873,315INPV4$8,000,000=$32,000,0004years20McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.Year1After-taxRealRiskyCashFlowsRiskyRealCashFlowsPrice:$400perunitwithzerorealpriceincreaseLabor:$15perhourwith2%realwageincreaseEnergy:$5perunitwith3%realenergycostincreaseYear1After-taxRealRiskyCashFlows:After-taxrevenues=$400100,000(1.34)=$26,400,000After-taxlaborcosts=$152,000,0001.02(1.34)=$20,196,000After-taxenergycosts=$52,00,0001.03(1.34)=$679,800After-taxnetoperatingCF=$26,400,000$20,196,000$679,800=$5,524,20021McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.Year2After-taxRealRiskyCashFlowsRiskyRealCashFlowsPrice:$400perunitwithzerorealpriceincreaseLabor:$15perhourwith2%realwageincreaseEnergy:$5perunitwith3%realenergycostincreaseYear1After-taxRealRiskyCashFlows:After-taxrevenues=$400100,000(1.34)=$26,400,000After-taxlaborcosts=$152,000,000(1.02)2(1.34)=$20,599,920After-taxenergycosts=$52,00,000(1.03)2(1.34)=$700,194After-taxnetoperatingCF=$26,400,000$20,599,920$700,194=$31,499,88622McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.Year3After-taxRealRiskyCashFlowsRiskyRealCashFlowsPrice:$400perunitwithzerorealpriceincreaseLabor:$15perhourwith2%realwageincreaseEnergy:$5perunitwith3%realenergycostincreaseYear1After-taxRealRiskyCashFlows:After-taxrevenues=$400100,000(1.34)=$26,400,000After-taxlaborcosts=$152,000,000(1.02)3(1.34)=$21,011.92After-taxenergycosts=$52,00,000(1.03)3(1.34)=$721,199.82After-taxnetoperatingCF=$26,400,000$21,011.92$721,199.82=$31,066,88223McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.Year4After-taxRealRiskyCashFlowsRiskyRealCashFlowsPrice:$400perunitwithzerorealpriceincreaseLabor:$15perhourwith2%realwageincreaseEnergy:$5perunitwith3%realenergycostincreaseYear1After-taxRealRiskyCashFlows:After-taxrevenues=$400100,000(1.34)=$26,400,000After-taxlaborcosts=$152,000,000(1.02)4(1.34)=$21,432.16After-taxenergycosts=$52,00,000(1.03)4(1.34)=$742,835.82After-taxnetoperatingCF=$26,400,000$21,432.16$742,835.82=$17,425,00724McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.ExampleofCapitalBudgetingunderInflation$5,524,200$31,499,886$31,066,882$17,425,007-$32,000,0000 1 2 3415,524,00032mCF1F1CF0131,499,886CF2F2131,066,882CF3F3117,425,007CF4F469,590,868INPV825McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.ExampleofCapitalBudgetingunderInflationTheprojectNPVcannowbecomputedasthesumofthePVofthecost,thePVoftheriskycashflowsdiscountedattheriskyrateandthePVoftherisk-freecashflowsdiscountedattherisk-freediscountrate.NPV=$32,000,000+$69,590,868+$9,873,315=$47,464,18326McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.7.3TheBoeing777:AReal-WorldExampleInlate1990,theBoeingCompanyannounceditsintentiontobuildtheBoeing777,acommercialairplanethatcouldcarryupto390passengersandfly7,600miles.Analystsexpectedtheup-frontinvestmentandR&Dcostswouldbeasmuchas$8billion.Deliveryoftheplaneswasexpectedtobeginin1995andcontinueforatleast35years.27McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.Table7.5IncrementalCashFlows:Boeing777Year UnitsSalesRevenueOperatingCostsDep.TaxesD DNWCCapitalSpendingInvest-mentNetCashFlow1991$865.00$40.00$(307.70)$400.00$400.00$(957.30)19921,340.0096.00(488.24)600.00600.00(1,451.76)19931,240.00116.40(461.18)300.00300.00(1,078.82)1994840.00124.76(328.02)200.00200.00(711.98)199514$1,847.551,976.69112.28(82.08)181.06181.061.85182.91(229.97)199614519,418.9617,865.45101.06493.831,722.001,722.0019.42 1,741.42681.74199714019,244.2316,550.0490.95885.10(17.12)19.422.301,806.79NetCashFlowcanbedeterminedinthreesteps:Taxes($19,244.23$16,550.04$90.95)0.34=$885.10Investment$17.12+$19.42=$2.30NCF$19,244.23$16,550.04$885.10$2.30=$1,806.7928McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.1991$(957.30)2002$1,717.262013$2,213.181992$(1,451.76)2003$1,590.012014$2,104.731993$(1,078.82)2004$1,798.972015$2,285.771994$(711.98)2005$616.792016$2,353.811995$(229.97)2006$1,484.732017$2,423.891996$681.742007$2,173.592018$2,496.051997$1,806.792008$1,641.972019$2,568.601998$1,914.062009$677.922020$2,641.011999$1,676.052010$1,886.962021$2,717.532000$1,640.252011$2,331.332022$2,798.772001$1,716.802012$2,576.472023$2,882.442024$2,964.45YearYearYearNCFNCFNCF29McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.7.3TheBoeing777:AReal-WorldExamplePriorto1990,Boeinghadinvestedseveralhundredmilliondollarsinresearchanddevelopment.Sincethesecashoutflowswereincurredpriortothedecisiontobuildtheplane,theyaresunk costs.TherelevantcostsweretheatthetimethedecisionwasmadeweretheforecastedNetCashFlows30McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.NPVProfileoftheBoeing777ProjectThisgraphshowsNPVasafunctionofthediscountrate.Boeingshouldacceptthisprojectatdiscountrateslessthan21percentandrejecttheprojectathigherdiscountrates.IRR=21.12%31McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.Boeing777Asitturnedout,salesfailedtomeetexpectations.InfairnesstothefinancialanalystsatBoeing,thereisanimportantdistinctionbetweenagooddecisionandagoodoutcome.32McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.7.4InvestmentsofUnequalLives:TheEquivalentAnnualCostMethodTherearetimeswhenapplicationoftheNPVrulecanleadtothewrongdecision.Considerafactorywhichmusthaveanaircleaner.Theequipmentismandatedbylaw,sothereisno“doingwithout”.Therearetwochoices:The“Cadillaccleaner”costs$4,000today,hasannualoperatingcostsof$100andlastsfor10years.The“Cheapskatecleaner”costs$1,000today,hasannualoperatingcostsof$500andlastsfor5years.Whichoneshouldwechoose?33McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.EACwithaCalculatorAtfirstglance,theCheapskatecleanerhasalowerNPV101004,614.464,000CF1F1CF0INPV1055002,895.391,000CF1F1CF0INPV10CadillacAirCleanerCheapskateAirCleaner34McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.7.4InvestmentsofUnequalLives:TheEquivalentAnnualCostMethodThisoverlooksthefactthattheCadillaccleanerlaststwiceaslong.Whenweincorporatethat,theCadillaccleanerisactuallycheaper.35McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.TheCadillaccleanertimelineofcashflows:7.4InvestmentsofUnequalLives:TheEquivalentAnnualCostMethod-$4,000 100 -100 -100 -100 -100 -100 -100 -100 -100 -1000 1 2 3 4 5 6 7 8 9 10-$1,000 500 -500 -500 -500-1,500 -500 -500 -500 -500 -5000 1 2 3 4 5 6 7 8 9 10TheCheapskatecleanertimelineofcashflowsover ten years:36McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.TheEquivalentAnnualCostMethodWhenwemakeafaircomparison,theCadillacischeaper:101004,614.464,000CF1F1CF0INPV1045004,6931,000CF1F1CF0INPV10CadillacAirCleanerCheapskateAirCleaner11,500CF2F15500CF3F137McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.InvestmentsofUnequalLivesReplacementChainRepeattheprojectsforever,findthePVofthatperpetuity.Assumption:Bothprojectscanandwillberepeated.MatchingCycleRepeatprojectsuntiltheybeginandendatthesametimelikewejustdidwiththeaircleaners.ComputeNPVforthe“repeatedprojects”.TheEquivalentAnnualCostMethod38McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.InvestmentsofUnequalLives:EACTheEquivalentAnnualCostMethodApplicabletoamuchmorerobustsetofcircumstancesthanreplacementchainormatchingcycle.TheEquivalentAnnualCostisthevalueofthelevelpaymentannuitythathasthesamePVasouroriginalsetofcashflows.NPV=EAC ArTWhereArT isthepresentvalueof$1perperiodforTperiodswhenthediscountrateisr.Forexample,theEACfortheCadillacaircleaneris$750.98TheEACforthecheaperaircleaneris$763.80whichconfirmsourearlierdecisiontorejectit.39McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.CadillacEACwithaCalculatorUsethecashflowmenutofindthePVofthe“lumpy”cashflows.Thenusethetimevalueofmoneykeystofindapaymentwiththatpresentvalue.101004,614.464,000CF1F1CF0INPV10750.98104,614.4610PMTI/YFVPVNPV40McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.CheapskateEACwithaCalculatorUsethecashflowmenutofindthePVofthecashflows.Thenusethetimevalueofmoneykeystofindapaymentwiththatpresentvalue.55004,693.211,000CF1F1CF0INPV10763.80104,693.2110PMTI/YFVPVNPV41McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.ExampleofReplacementProjectsConsideraBelgianDentistsoffice;heneedsanautoclavetosterilizehisinstruments.Hehasanoldonethatisinuse,butthemaintenancecostsarerisingandsoisconsideringreplacingthisindispensablepieceofequipment.NewAutoclaveCost=$3,000today,Maintenancecost=$20peryearResalevalueafter6years=$1,200NPVofnewautoclave(atr=10%)is$2,409.74 EACofnewautoclave=-$553.2942McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.ExampleofReplacementProjectsExistingAutoclaveYear012345Maintenance 0200275325450500Resale900850775700600500Total Annual CostTotalCostforyear1=(9001.10850)+200=$340340435TotalCostforyear2=(8501.10775)+275=$435478 TotalCostforyear3=(7751.10700)+325=$478620TotalCostforyear4=(7001.10600)+450=$620TotalCostforyear5=(6001.10500)+500=$660660Note that the total cost of keeping an autoclave for the first year includes the$200 maintenance cost as well as the opportunity cost of the foregone future value of the$900 we didnt get from selling it in year 0 less the$850 we have if we still own it at year 1.43McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-Hill Companies,Inc.All Rights Reserved.NewAutoclaveEACofnewautoclave=-$553.29ExistingAutoclaveYear012345Maintenance0200275325450500Resale900850775700600500Total Annual CostExampleofReplacementProjects340435478620660Weshouldkeeptheoldautoclaveuntilitscheapertobuyanewone.Replacetheautoclaveafteryear3:atthatpointthenewonewillcost$553.29forthenextyearsautoclavingandtheoldonewillcost$620foronemoreyear.44McGraw-Hill/IrwinCorporate Finance,7/e 2005 The McGraw-H。

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