Question

Unequal lives: ANPV approach JBL Co. has designed a new conveyor system. Man- agement must choose among three alternative courses of action: (1) The firm can sell the design outright to another corporation with payment over 2 years; (2) it can li- cense the design to another manufacturer for a period of 5 years, its likely product life; or (3) it can manufacture and market the system itself, an alternative that will result in 6 years of cash inflows. The company has a cost of capital of 12%. Cash flows associated with each alternative are as shown in the following table. Alternative Initial investment (CF) Year (1) Sell -$200,000 Manufacture -$450,000 $200,000 250,000 License -$200,000 Cash inflows (CF) $250,000 100,000 80,000 60,000 40,000 $200,000 250,000 200,000 200,000 200,000 200,000 a. Calculate the net present value of each alternative and rank the alternatives on the basis of NPV. b. Calculate the annualized net present value (ANPV) of each alternative, and rank them accordingly. c. Why is ANPV preferred over NPV when ranking projects with unequal lives?

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins Formulas - 2x AutoSum - A 11 pt General AA = = = A E Wrap Text Merge Merge & Center Center SF $ - % % 4:0 .00 8. Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Fill Clear Sort & Filter Editing Find & Select Alignment Number Cells File Home Insert Page Layout % Cut Calibri Ea Copy Paste Format Painter B I U D Clipboard Font DQ41 I 40 41 42 43 44 PROJECT DH DI DJ DK DL DM DN Do DP DO DR DS DA FORMULA = 1/(1+r)^n = 1/(1+0.12)^n SELL LICENSE MANUFACTURE PV FACTOR AT 12.00% 45 year 46 47 48 -200000 200000 250000 49 50 -200000 250000 100000 80000 60000 40000 -450000 200000 250000 200000 200000 200000 200000 А. BC PV OF CFAT PV OF CFAT PV OF CFAT A*E B*E C*E -200000.00 -200000.00 450000.00 178571.43 223214.29 178571.43 199298.47 79719.39199298.47 56942.42 142356.05 38131.08 127103.62 22697.07 113485.37 101326.22 177869.90 220704.25 412141.16 105245.28 61225.51 100243.33 0.892857 0.797194 0.711780 0.635518 0.567427 0.506631 NPV ---> ANPV ---> 51 52 53 54 55 56 57 58 K [NPV/PVIFA@12%, 2 YEARS] [177869.90/1.690051] NPV RELEVANT BETA LEVERED REPLACEMENT H RATION PBP ARR invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS BOND I RRnpvbeta ferences Rea _ + OPTION TO WAIT STEIN BO 130% _ * 0 ENG 2. B 19 30-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins Formulas - 2x 11 pt General File Home Insert Page Layout % Cut Calibri Ea Copy Paste B I U D Format Painter Clipboard Font AA = = = A E E = 5 Wrap Text Fat Merge Merge & Center Center Σ AutoSum : A Fill 2 Sort & m Find & st $ - % $ % , .0 .00 8. Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles 2 Clear Filter Editing Select Alignment Number Cells DP77 DH DI DJ DK DL DM DNDODPDQ DR DS DE 59 RANK 60 61 62 63 64 PROJECT MANUFACTURE LICENSE SELL NPV 412141.16 220704.25 177869.90 w NP 65 RANK FORMULA 66 PROJECT SELL MANUFACTURE LICENSE ANPV 105245.28 100243.33 61225.51 ANPV = NPV/PVIFA NPV/PVIFA @12%, 2 YEARS NPV/PVIFA @12%, 5 YEARS NPV/PVIFA @12%, 6 YEARS 67 68 69 70 71 72 When we calculate the NPV of the given projects, their unequal lives are not taken into consideration But With ANPV, the NPV is converted to an annuity having equal life and NPV for each project so WHEN THE LIVES ARE UNEQUAL, WE SHOULD USE ANPV AS IT GIVES NET VALUE ADDED PER YEAR 73 74 75 76 77 H RATION PBP ARR invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND I RRnpvbeta ferences OPTION TO WAIT BO 130% STEIN Rea 0 + DOER 9 * * O ENG 30-11-2019)