Question
Unequal liveslong dashANPV approachEvans Industries wishes to select the best of three possible machines, each of which is expected to satisfy the firm's ongoing need
Unequal
liveslong dashANPV
approachEvans 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
machineslong dashA,
B, and
Clong dashare
equally risky. The firm plans to use a cost of capital of
12.4 %12.4%
to evaluate each of them. The initial investment and annual cash inflows over the life of each machine are shown in the following table.(Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)
Machine A | Machine B | Machine C |
| |
Initial investment (CF 0CF0) | $91 comma 00091,000 | $64 comma 80064,800 | $100 comma 300100,300 | |
Year (tt ) | Cash inflows (CF Subscript tCFt) | |||
1 | $12 comma 70012,700 | $10 comma 10010,100 | $29 comma 00029,000 | |
2 | 12 comma 70012,700 | 20 comma 10020,100 | 29 comma 00029,000 | |
3 | 12 comma 70012,700 | 29 comma 10029,100 | 29 comma 00029,000 | |
4 | 12 comma 70012,700 | 40 comma 90040,900 | 29 comma 00029,000 | |
5 | 12 comma 70012,700 | long dash | 29 comma 00029,000 | |
6 | 12 comma 70012,700 | long dash | long dash |
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?
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