Question

Unequal liveslong 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 2years.​ (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 6years of cash inflows. The company has a cost of capital of 11.8% Cash flows associated with each alternative are as shown in the following table.

Alternative	Sell	License	Manufacture
Initial investment ​CF0​)	​$199,200	​$200,200	​$450,200
Year ​(t)	Cash inflows(CFt​)
1	​$199,300	​$251,000	​$199,600
2	249,500	101,000	260,000
3		80,100	199,600
4		60,300	199,600
5		40,300	199,600
6			199,600

a. Calculate the net present value of each alternative and rank the alternatives on the basis of NPV.

b. Calculate the annualized net present value​ (ANPV) of each alternative and rank them accordingly.

c.  Why is ANPV preferred over NPV when ranking projects with unequal​ lives?

Answer 1