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GoodEats, a chain of diner restaurants, is considering the purchase of new Garland brand energy efficient refrigerators for all of its 60 restaurants. These new refrigerators will cost $15,000 each and will have useful lives of five years before they will need to be replaced. Installation of the total set of 60 refrigerators will cost $100,000. The net cost saving is expected to peak in the first year at $200,000 and subsequently decline at a rate of 12% each year. At the end of their usage lifecycle, the salvage value of these refrigerators is likely to be 5% of their total purchase price.
What is the payback period?
In addition, to the option of purchasing the Garland brand energy efficient refrigerators; the company is also considering some less expensive models from Bolger Appliances. The Bolger units will cost only $6000 each and it will cost the same ($100,000) to install all 60 refrigerators. The refrigerators will have a useful life of only four years and will produce net cost savings of $120,000 per year because they are not as energy efficient. There is no salvage value associated with these refrigerators. Based on a careful analysis, the company sets a discount rate at 10%. Calculate the NPV for both projects? What model of refrigerators should the company purchase?
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