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 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 ​(CF 0CF0​)	​$92,600	​$64,600	​$100,900
Year ​(t ​)	Cash inflows ​(CFt​)
1	​$11,800	​$10,600	​$30,600
2	11,800	20,300	30,600
3	11,800	29,800	30,600
4	11,800	39,200	30,600
5	11,800	—	30,600
6	11,800	—	—

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