P1130 Unequal lives: ANPV approach JBL Co. has designed a new conveyor system. Management must choose among
Question:
P11–30 Unequal lives: ANPV approach JBL Co. has designed a new conveyor system. Management must choose among three alternative courses of action: (1) The firm can sell the design outright to another corporation with payment over 2 years; (2) it can license the design to another manufacturer for a period of 5 years, its likely product life; or (3) it can manufacture and market the system itself, an alternative that will result in 6 years of cash inflows. The company has a cost of capital of 12%. Cash flows associated with each alternative are as shown in the following table.
a. Calculate the net present value of each alternative and rank the alternatives on the basis of NPV.
b. Calculate the annualized net present value (ANPV) of each alternative, and rank them accordingly.
c. Why is ANPV preferred over NPV when ranking projects with unequal lives?
Step by Step Answer:
Principles Of Managerial Finance
ISBN: 9780133546408
7th Edition
Authors: Lawrence J Gitman, Chad J Zutter