Richard and Linda Butler decide that it is time to purchase a high-definition (HD) television because the technology has improved and prices have fallen over the past 3 years. From their research, they narrow their choices to two sets, the Samsung 42-inches LCD with 1080p capability and the Sony 42-inches LCD with 1080p features. The price of the Samsung is $2,350 and the Sony will cost $2,700. They expect to keep the Samsung for 3 years; if they buy the more expensive Sony unit, they will keep the Sony for 4 years. They expect to be able to sell the Samsung for $400 by the end of 3 years; they expect they could sell the Sony for $350 at the end of the 4 years. Richard and Linda estimates that the one-of-year entertainment benefits (i.e., not going to movies or events and watching at home) from the Samsung to be $900 and for the Sony to be $1,000. Both sets can be viewed as quality units and are equally risky purchases. They estimate their opportunity cost to be 9%.
The Butlers wish to choose the better alternative from purely financial perspective. To perform this analysis they wish to do the following:
a. Determine the NPV of the Samsung HD LCD.
b. Determine the ANPV of the Samsung HD LCD
c. Determine the NPV of the Sony HD LCD.
d.Determine the ANPV of the Sony HD LCD
e. Which set should the Butlers purchase and why?
This solution illustrates how to compute the net present value and annualized net present value of an investment.