Calculate NPV for Excavator Purchase Options: Which is the Best Investment?
Which of the three excavator purchase options provides the highest Net Present Value (NPV)?
How can we determine the NPV for each option and make a recommendation for implementation?
Calculating NPV for Excavator Purchase Options
Based on the calculations using three different methods (NPV option, Change cash flow option, and FV option) with a discount rate of 10% and a financing rate of 6%, the NPV values for the three options are as follows:
Option 1: NPV = -R11,297.53
Option 2: NPV = R9,155.36
Option 3: NPV = R19,457.75
Recommendation for Implementation
The recommended option for implementation would be Option 3, as it has the highest positive NPV among the three options. This indicates that Option 3 is expected to generate the highest net cash inflow and provide the best return on investment compared to the other options.
To calculate the Net Present Value (NPV) for each option, we need to discount the cash flows to their present values and then subtract the initial investment. The formula for NPV is:
NPV = Σ(CF_t / (1 + r)^t) - Initial Investment
where CF_t represents the cash flow in year t, r is the discount rate, and t is the year.
Calculations for Each Option:
Option 1: Buy two large excavators
Initial Investment = 2 * R25,000 = R50,000
Year: 0 1 2 3 4 5 6 7 8
Income: 0 0 R50,000 R70,000 R50,000 R50,000 R50,000 R70,000 R70,000
Expense: 0 R25,000 R30,000 R36,000 R38,000 R40,000 R45,000