Babylon Products is considering the purchase of one of three mutually exclusive projects for increasing production efficiency.

Question:

The firm plans to use a 14 percent cost of capital to evaluate these equalÂrisk projects. The initial investment and annual cash inflows over the life of each project are shown in the following table.

a. Calculate the NPV for each project over its life. Rank the projects in descending order on the basis of NPV.
b. Use the annualized net present value (ANPV) approach to evaluate and rank the projects in descending order on the basis of ANPV.
c. Compare and contrast your findings in parts a and b. Which project would you recommend that the firm purchase? Why?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...