Although changing technology and inflation will

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Unformatted text preview: ill provide the same expected future cash inflows. Although changing technology and inflation will affect the initial investment and expected cash inflows, the lack of specific attention to them does not detract from the usefulness of this technique. 444 PART 3 Long-Term Investment Decisions Step 2 Divide the net present value of each project having a positive NPV by the present value interest factor for an annuity at the given cost of capital and the project’s life to get the annualized net present value for each project j, ANPVj, as shown below: ANPVj NPVj PVIFAk,nj (10.6) Step 3 Select the project that has the highest ANPV. EXAMPLE By using the AT Company data presented earlier for projects X and Y, we can apply the three-step ANPV approach as follows: Step 1 The net present values of projects X and Y discounted at 10%—as calculated in the preceding example for a single purchase of each asset—are NPVX $11,248 (calculator/spreadsheet value $11,277.24) NPVY $18,985 (calculator/spreadsheet value $19,013.27) Step 2 Table Use Calculate the annualized net present value for each project by applying Equation 10.6 to the NPVs. ANPVX $11,248 PVIFA10%,3yrs $11,248 2.487 $4,523 ANPVY $18,985 PVIFA10%,6yrs $18,985 4.355 $4,359 Calculator Use The keystrokes required to find the ANPV on a financial calculator are identical to those demonstrated in Chapter 4 for finding the annual payments on an installment loan. These keystrokes are shown below for project X and for project Y. The resulting ANPVs for projects X and Y are $4,534.74 and $4,365.59, respectively. Project X Project Y Input Function 11277.24 PV Input Function 19013.27 PV 3 N 6 10 I 10 N I CPT CPT PMT PMT Solution 4534.74 Solution 4365.59 CHAPTER 10 Risk and Refinements in Capital Budgeting 445 Spreadsheet Use Comparison of the annualized net present values of two projects with unequal lives also can be calculated as shown on the following Excel spreadsheet. Step 3 Reviewing the ANPVs calculated in Step 2, we can see that project X would be preferred...
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This document was uploaded on 01/19/2014.

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