Question

Unequal lives-ANPV approach Evans Industries wishes to select the best of three possible machines, each of which is expected to satisfy the firm's ongoing need for additional aluminum-extrusion capacity. The three machines-A, B, and C-are equally risky. The firm plans to use a cost of capital of 12.4% to evaluate each of them. The initial investment and annual cash inflows over the life of each machine are shown in the following table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Machine A Machine B Machine C Initial investment (CFn) $91,900 $100,500 $64,400 Cash inflows (CF) Year (t) $29,200 29.200 $10.400 1 $11,600 11,600 11,600 11,600 2 20,900 31,000 41,000 3 29,200 4 29.200 5 11,600 29.200 11.600 6 a. Calculate the NPV for each machine over its life. Rank the machines in descending order on the basis of NPV. b. Use the annualized net present value (ANPV) approach to evaluate and rank the machines in descending order on the basis of ANPV c. Compare and contrast your findings in parts (a) and (b). Which machine would you recommend that the firm acquire?

Answer 1

a]	MACHINE A:
	NPV = -91900+11600*(1.124^6-1)/(0.124*1.124^6)=	$      -44,743.12
	MACHINE B:
	NPV = -64400+10400/1.124+20900/1.124^2+31000/1.124^3+41000/1.124^4 =	$          8,913.41
	MACHINE C:
	NPV = -100500+29200*(1.124^5-1)/(0.124*1.124^5) =	$          3,724.71
b]	MACHINE A:
	ANPV = -44743*0.124*1.124^6/(1.124^6-1) =	$      -11,006.21
	MACHINE B:
	ANPV = 8913.41*0.124*1.124^4/(1.124^4-1) =	$          2,959.36
	MACHINE C:
	ANPV = 3724.71*0.124*1.124^5/(1.124^5-1) =	$          1,043.53
c]	Using NPV, Machine B with highest positive NPV
	should be purchased.
	Using ANPV, Machine B with highest positive ANPV
	should be purchased.