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 ​(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?

Answer 1