P12-14 Unequal lives: ANPV approach Portland Products is considering the purchas

Question

P12-14 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 ini- tial investment and annual cash inflows over the life of each project are shown in the following table Project Z Project X Project Y $78,000 Initial investment (CFo) $52,000 $66,000 Year (t) Cash inflows (CF) $17,000 $28,000 $15,000 25,000 38,000 15,000 33,000 15,000 41,000 15,000 15,000 15,000 15,000 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 met 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 p Why?

Explanation / Answer

NPV= Cash Inflows(PV, years @14%)-Cash Outflows

Project X=17000*.877+25000*.769+33000*.675+41000*.592-78000

NPV= $ 2681

Annualised Cash Flow= 2681/2.913=920.35

Project Y=28000*.877+38000*.769-52000

NPV= 1778

Annualised Cash Flow = 1778/1.646 =$ 1080.19

Project Z=15000*4.64-66000

NPV= $ 3583

Annualised cash Flow= 3583/4364=772

Ranking

1. Project z

2. Project X

3. Project Y

As per Annualised Cash Flows

1. Project Y

2. Project X

3. Project Z

I will recommend project Y due to its higher annualised cash inflows

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