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**Unformatted text preview: **ns 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 machines—A, B,
and C—are equally risky. The firm plans to use a 12% cost of capital to evaluate
each of them. The initial investment and annual cash inflows over the life of each
machine are shown in the following table. Machine A
Initial investment (CF0) Machine B Machine C $92,000 $65,000 $100,500 Year (t) Cash inflows (CFt ) 1 $12,000 $10,000 $30,000 2 12,000 20,000 30,000 3 12,000 30,000 30,000 4 12,000 40,000 30,000 5 12,000 — 30,000 6 12,000 — — 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? Why?
LG5 10–12 Unequal lives—ANPV approach Portland Products is considering the purchase
of one of three mutually exclusive projects for increasing production efficiency.
The firm plans to use a 14% cost of capital to evaluate these equal-risk projects.
The initial investment and annual cash inflows over the life of each project are
shown in the following table. CHAPTER 10 Risk and Refinements in Capital Budgeting Project X
Initial investment (CF0) Project Y Project Z $78,000 $52,000 459 $66,000 Year (t) Cash inflows (CFt) 1 $17,000 $28,000 2 25,000 38,000 $15,000
15,000 3 33,000 — 15,000 4 41,000 — 15,000 5 — — 15,000 6 — — 15,000 7 — — 15,000 8 — — 15,000 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?
LG5 10–13 Unequal lives—ANPV approach JBL Co. has designed...

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