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 of action: (1) The firm can sell the design outright to another corporation with payment over 2 years. (2) It can license the design to another manufacturer for a period of 5 years, its likely product life. (3) It can manufacture and market the system itself; this alternative will result in 6 years of cash inflows. The company has a cost of capital of 12.6% Cash flows associated with each alternative are as 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.)

Explanation / Answer

a and b parts answered below

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c.

ANPV is defined by NPV divided by the Annuity Factor for the projects.

ANPV is a better measure when we are comparing products with different project lives.

For E.g if interest rate is 10%, a one year project of NPV with $1000 is better than a ten year project with $1100.

NPV does not take into account the prject life in this manner while ANPV Does.

Thus, ANPV is only a modified version of NPV and is more suited when we are comparing projects with diffferent lives as in this question.

Time Period Cash Flow Alternative 1 - Sell Disc Fac@ 12.6% Cash Flow * Disc Fac Time Period Cash Flow Alternative 2 - Liscence Disc Fac@ 12.6% Cash Flow * Disc Fac Time Period Cash Flow Alternative 3- Manufacture Disc Fac@ 12.6% Cash Flow * Disc Fac 1 199000 0.888099467 176731.79 1 250500 0.888099467 222468.92 1 200000 0.888099467 177619.89 2 251000 0.788720664 197968.89 2 99700 0.788720664 78635.45 2 250000 0.788720664 197180.17 3 80500 0.700462401 56387.22 3 200000 0.700462401 140092.48 4 60700 0.622080285 37760.27 4 200000 0.622080285 124416.06 5 39200 0.55246917 21656.79 5 200000 0.55246917 110493.83 6 200000 0.490647575 98129.52 Total 1.68 374700.68 3.55 416908.65 4.04 847931.95 Thus, NPV are Cash Flow Alternative 1 - Sell 374700.68 Rank 3 Cash Flow Alternative 2 - Liscence 416908.65 Rank 2 Cash Flow Alternative 3- Manufacture 847931.95 Rank 1 Now ANPV = NPV/ Annuity Factor (Annuity factor is the total of disc factor as in the table above) Thus ANPV Caln Are Cash Flow Alternative 1 - Sell (374700.68/1.68) 223459.08 Rank 1 Cash Flow Alternative 2 - Liscence (416908.65/3.55) 117378.48 Rank 3 Cash Flow Alternative 3- Manufacture (847931.44/4.04) 209755.41 Rank 2

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