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 11.2 % to evaluate each of them. The initial investment and annual cash inflows over the life of each machine are shown in the following table.

Initial investment
( |
$91,400 |
$64,900 |
$100,900 |

Year
( |
Cash inflows
( |
||

1 |
$11,000 |
$9,900 |
$30,400 |

2 |
11,000 |
19,400 |
30,400 |

3 |
11,000 |
29,300 |
30,400 |

4 |
11,000 |
39,200 |
30,400 |

5 |
11,000 |
— |
30,400 |

6 |
11,000 |
— |
--- |

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

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 12.2% to evaluate each of them. The initial
investment and annual cash inflows over the life of each machine
are shown in the following table
Machine A
Machine B
Machine C
Initial investment...

Unequal liveslong dashANPV 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 12.8
% to evaluate each of them. The initial investment and annual cash
inflows over the life of each machine are shown in the following
table.
Machine A Machine B ...

Unequal
liveslong dash—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
machineslong dash—A,
B, and
Clong dash—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...

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