Question

# Unequal lives--ANPV approach    Evans Industries wishes to select the best of three possible​ machines, each of...

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 ​(CF0​) ​\$91,400 ​\$64,900 ​ \$100,900 Year ​(t ​) Cash inflows ​(CFt​) 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?

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