Elic Corporation 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 licence the design to another manufacturer for a period of 5 years. 3) It can manufacture and market the system itself, the life is 6 years then. Cost of capital is 12%. Cash flows for each alternative presented below:

Years Sell Licence Manufacture

0 (200,000) (200,000) (450,000)

1 200,000 250,000 200,000

2 250,000 100,000 250,000

3 - 80,000 200,000

4 - 60,000 200,000

5 - 40,000 200,000

6 - - 200,000

a. Calculate NPV of each alternative and rank them with respect to their NPV:

b. Calculate annualized NPV of each alternative and rank them accordingly.

c. Why is ANPV preferred over NPV when ranking the projects?

d. Assess the riskiness of each alternative by calculating break even cash flows. What can you say about riskiness of each independently? No need to compare the projects with respect to BE cash flows.

e. What if one customer decided to place an upfront order which will provide 100,000 additional annual cash flow for the Manufacturing option. How would you evaluation of riskiness for this option change? Plaese explain.