Investing Basics

Cost Minimization with Net Present Value (NPV)

You are considering buying 1 of 3 different photocopiers. You will choose the one that costs the least and has the highest value. Each photocopier has 5 years of useful life. Your options are:

If your required rate of return is 9%, which copier will you choose?

Xerox:

CFO = -10000
CO1 = 750 (this is the annual servicing cost)
FO1 = 5 (since the useful life of the photocopier is 5 years)

CPT -> NPV

I = 9% (this is your required rate of return)

NPV -> CPT = -$12,917

Canon:

CFO = -12000
CO1 = 250 (this is the annual servicing cost)
FO1 = 5 (since the useful life of the photocopier is 5 years)

CPT -> NPV

I = 9% (this is your required rate of return)

NPV -> CPT = -$12,972

Sharp:

CFO = -14000
CO1 = 100 (this is the annual servicing cost)
FO1 = 5 (since the useful life of the photocopier is 5 years)

CPT -> NPV

I = 9% (this is your required rate of return)

NPV -> CPT = -$14,389

Here's a summary of this problem;

Which one would you choose? You choose the one that has the least cost, which is Xerox amounting to $-12,917.