-4 points Question 2 (evaluating investment projects) General Motors (or Toyota)
ID: 2462042 • Letter: #
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-4 points Question 2 (evaluating investment projects) General Motors (or Toyota) is thinking of investing in new production equipment, which will cost $500 million in year zero, and will generate cost savings of $300 million in year 1, $200 million in year 2, and $150 million in year 3. After 3 years, the salvage value is zero. The cost of capital (discount rate) is 25% for General Motors and 10% for Toyota. (Due to GM's recent bankruptcy, investors are scared to lend it money, so GM has to pay much higher interest rates to attract capital). Required a) What's the NPV of this project for General Motors? NPV = $ enter it with a minus sign, i.e., -3.52 not (3.52)) Should GM invest, based on NPV? (layes, 2=no) million (If you get say $3.52 million, enter 3.52 not 3,520,000. If you get a negative number, b) What's the NPV of this project for Toyota? NPV = $ million Should Toyota invest, based on NPV? (1-yes, 2 no) c) If you computed (a) and (b) correctly, the decisions for GM and Toyota should be different. Briefly explain why they are different. This answer has not been graded yet. DOLLExplanation / Answer
a). NPV of this Project for General Motors= -$500+$300/1.25+$200/1.25^2+$150/1.25^3
= $55.2
Should GM Invest Based on NPV = 1,Yes
b). NPV of this Project for Toyota = -$500+$300/1.10+$200/1.10^2+$150/1.10^3
= -$50.71
Should Toyota Invest Based on NPV = 2, No
c). The decisions of GM and Toyota are different as the NPV of GM is a Positive Number(>0) so the proposal is acceptable to GM But In the Case of Toyota the NPV is Negative(<0) So the Proposal is not Acceptable .
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