Question

Initial investment (CF.) Year (t) Machine A 591,500 The firm plans to use a cost of capital of 11.4% to evaluate each of them. $11,300 11,300 11,300 11,300 11,300 11,300 Macnine B Machine $65,400 $100,800 Cash inflows (CF) $10,800 $30,100 20,200 30,100 30,900 30,100 39,200 30,100 30,100 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

11.40% Year Machine A Machine B Machine C Initial Investment -91500 -65400 -100800 11300 10800 30100 11300 20200 30100 11300 30900 30100 11300 39200 30100 11300 30100 11300 -39713 7519 8381 NPV(F1,C2:C8) NPV(F1,D2:06) NPV(F1, E2:E7) Rank 1 Machine C 8381 Rank 2 Machine B 7519 Rank 3 Machine A -39713 own ANPV 2290 2 Rank 1 Rank 2 Rank 3 -9496 2444 PMT($F$1,38,-C9) PMT($F$1,B6,-D9) PMT($F$1,B7,-E9) Machine B 2444 Machine C 2290 Machine A -9496 3 Through NPV Machine C is higher, than Machine B. Howeever through ANPV Machine B is higher. Machine B ANPV is higher because it's the number of years to get retun on investment is 4 years as compared to 5 years in Machine B. I would recommend Machine B as its ANPV is highest