Unequal lives-ANPV approach JBL Co. has designed a new conveyor system. Manageme

Question

Unequal lives-ANPV approach JBL Co. has designed a new conveyor system. Management must choose among three alternative courses ot action (1) The tim can sell the design outnght to another corporation with payment over 2 years (2) It can license the design to another manutacturer tor a period ot years, its likely product life 3 It can manufacture and market the system itself this alternative will result in 6 years of cash in o s The company has a cost of capital of 1 1.6%. Cash flows associated with each alternative are as shown in he following table. Sell $199,600 License Manufacture $201,000 Initial investment (CFo) Year (t) $449,900 Cash inflows (CF) $200,700 $250,500 100,600 80,400 9,200 39,100 $199,200 240,000 199,200 199,200 199,200 199,200 249,500

Explanation / Answer

(A)>Calculation of NPV for the three alternatives:-

>>Ranks as per NPV Technique : 1 Manufacture

2 Licence

3 Sell

(B) Calculation of APNV :-      NPV/PVAF(11.6%,Years)

1) Sell :- NPV/PVAF(11.6%,2) = 180,805.75/1.6989 = $ 106,425.18

2) Licence :- NPV/PVAF(11.6%,5)= 222,809.9/3.641= $ 61,167.70

3) Manufacure :- NPV/PVAF(11.6%,6)= 411,171.76/4.158= $ 98,886.90

>>Ranks as per ANPV Technique :

1 Sell

2 Manufacture

3 Licence

(C) Select options B, C , D

Year PVf @ 11.6% Sell $ Licence $ Manufacture $ PV Sell $ PV Licence $ PV Manufacture $ Cashinflows 1 0.8960 200,700 250,500 199,200 179,827.20 224,448.00 178,483.20 2 0.8029 249,500 100,600 240,000 200,323.55 80,771.74 192,696.00 3 0.7194 - 80,400 199,200 - 57,839.76 143,304.48 4 0.6447 - 59,200 199,200 - 38,166.24 128,424.24 5 0.5776 - 39,100 199,200 - 22,584.16 115,057.92 6 0.5176 - - 199,200 - - 103,105.92 Total Cash inflows 380,105.75 423,809.90 861,071.76 Cash outflows 0 1 199,600 201,000 449,900 199,600.00 201,000.00 449,900.00 NPV (Total Cash Inflows-Total cash Outflows) 180,505.75 222,809.9 411,171.76

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