Unequal lives-ANPV approach Evans Industries wishes to select the best of three

Question

Unequal lives-ANPV approach Evans 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 cost of capital of 11.5% 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 B $65,300 Cash inflows (CFt) $9,700 19,000 30,900 41,000 Machine A Machine C Initial investment (CFo) Year (t) $92,000 $99,900 $11,700 11,700 11,700 11,700 11,700 11,700 S30,800 30,800 30,800 30,800 30,800 4 . Calculate the NPV for each machine over its life. Rank the machines in descending order on the basis of NPV . Use the annualized net present value (ANPV) approach to evaluate and rank the machines in descending order on the basis of ANPV . Compare and contrast your findings in parts (a) and (b). Which machine would you recommend that the firm acquire?

Explanation / Answer

interest rate 11.50% Year Machine A Machine B Machine C PV fatctor PV Machine A PV Machine B PV Machine C 0           (92,000)     (65,300)     (99,900) 1.000         (92,000)     (65,300)    (99,900) 1              11,700          9,700        30,800 0.897           10,493          8,700      27,623 2              11,700        19,000        30,800 0.804              9,411        15,283      24,774 3              11,700        30,900        30,800 0.721              8,440        22,291      22,219 4              11,700        41,000        30,800 0.647              7,570        26,527      19,927 5              11,700        30,800 0.580              6,789                 -        17,872 6              11,700 0.520              6,089                 -                  -   Net Present Value         (43,208)          7,500      12,516 Ranking Machine 1 C 2 B 3 A Solution 2 Annualized NPV Annual NPV = PV*((i*(1+i)^n)/(((1+i)^n)-1)) Machine A =-43208*((11.5%*(1+11.5%)^6)/(((1+11.5%)^6)-1))           (10,361) Machine B =7500*((11.5%*(1+11.5%)^4)/(((1+11.5%)^4)-1))                2,443 Machine C =12516*((11.5%*(1+11.5%)^5)/(((1+11.5%)^5)-1))                3,429 Ranking Machine 1 C 2 B 3 A Solution C In both options, it is recommended to go for machine C

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