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You are the director of a company and you are considering updating all of your computers to new models. Using the old computers you have net cash flows of $92,167 per year and it is estimated that with the new computers net cash flows would grow to $124,425 per year. Updating all of the computers would initially cost $111,983. The estimated remaining life of the old computers is 2 years and the expected lifetime of the new computers is 4 years. The scrap value of the old computers is estimated to be $21,198 irrespective of whether they are scrapped today or in 2 years. The new computers have an estimated scrap value at the end of their life of $27,557.
Management is considering two different options:
-Option 1: Use the old computers for 2 more years and then replace them with the new computers that will then be replaced every 4 years in perpetuity.
-Option 2: Replace the old computers with the new computers now and replace them every 4 years in perpetuity.The company's required rate of return is 14.9% pa. Assume that the cost of the computers, the cash flows that they generate and their scrap value remain constant over time.
Calculate NPV of option 1 and option 2. Which option should we undertake
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