Pliable Corporation is trying to decide when to purchase a new computer system for its offices.  The company's opportunity cost of capital is 10 percent annually. Analysts have projected that the cost of the computer system will fall over time due to improvements in manufacturing methods.  Analysts have also estimated the present value—as of the date of purchase—of Pliable's savings from purchasing the computer system. These savings increase with the length of delay in purchasing the computers because of anticipated enhancements over time in computer capacity and speed. The table below shows both sets of estimates. A. Find the optimal date for Pliable to purchase the computer system, assuming that the future cash flows are subject to geometrically increasing risk.  Explain your reasoning and show your work. B. Suppose instead that Pliable faces risk that is just one-perio

Essentials Of Investments
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Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Pliable Corporation is trying to decide when to purchase a new computer system for its offices.  The company's opportunity cost of capital is 10 percent annually.

Analysts have projected that the cost of the computer system will fall over time due to improvements in manufacturing methods.  Analysts have also estimated the present value—as of the date of purchase—of Pliable's savings from purchasing the computer system. These savings increase with the length of delay in purchasing the computers because of anticipated enhancements over time in computer capacity and speed. The table below shows both sets of estimates.

A. Find the optimal date for Pliable to purchase the computer system, assuming that the future cash flows are subject to geometrically increasing risk.  Explain your reasoning and show your work.

B. Suppose instead that Pliable faces risk that is just one-period-ahead and that the risk-free rate of return is 3 percent.  Find the optimal date for Pliable to purchase the computer system.  Explain your reasoning and show your work.  If you find any discrepancy between your answers to (A) and (B), please provide a verbal explanation.

Cost of Computer
System (at date of
purchase, $
thousands)
Year of Purchase
Present Value of
Savings (evaluated at
date of purchase, $
thousands)
$100
$90
$160
$172
$182
$190
$196
$200
$202
1
$82
$76
$72
$70
$69
3
4
6
Transcribed Image Text:Cost of Computer System (at date of purchase, $ thousands) Year of Purchase Present Value of Savings (evaluated at date of purchase, $ thousands) $100 $90 $160 $172 $182 $190 $196 $200 $202 1 $82 $76 $72 $70 $69 3 4 6
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