Question

Unequal liveslong dash—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 machineslong dash—​A, B, and C long dash—are equally risky. The firm plans to use a cost of capital of 12.3% 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 here in order to copy the contents of the data table below into a​ spreadsheet.)

	Machine A	Machine B	Machine C
Initial investment ​(CF 0CF0​)	​$92 comma 90092,900	​$64 comma 10064,100	​$99 comma 90099,900
Year ​(tt ​)	Cash inflows ​(CF Subscript tCFt​)
1	​$11 comma 40011,400	​$10 comma 60010,600	​$30 comma 50030,500
2	11 comma 40011,400	19 comma 40019,400	30 comma 50030,500
3	11 comma 40011,400	29 comma 90029,900	30 comma 50030,500
4	11 comma 40011,400	40 comma 70040,700	30 comma 50030,500
5	11 comma 40011,400	long dash—	30 comma 50030,500
6	11 comma 40011,400	long dash—	long dash—

a. Calculate the NPV for each machine over its life. Rank the machines in descending order on the basis of NPV.

b. Use the annualized net present value​ (ANPV) approach to evaluate and rank the machines in descending order on the basis of ANPV.

c. Compare and contrast your findings in parts

​(a​)

and

​(b​).

Which machine would you recommend that the firm​ acquire?

Answer 1

Machine A
ans 1
Machine A
Year	Cash flows	Discount factor12.3%	Discounted cash flow
0	-92900	1	-92900
1	11400	0.89047	10151
2	11400	0.79294	9040
3	11400	0.70609	8049
4	11400	0.62875	7168
5	11400	0.55989	6383
6	11400	0.49856	5684
		NPV	-46426
Note NPV rounded o zero decimal
Machine B
Year	Cash flows	Discount factor12.3%	Discounted cash flow
0	-64100	1	-64100
1	10600	0.89047	9439
2	19400	0.79294	15383
3	29900	0.70609	21112
4	40700	0.62875	25590
		NPV	7424
Machine A
Year	Cash flows	Discount factor12.3%	Discounted cash flow
0	-99900	1	-99900
1	30500	0.89047	27159
2	30500	0.79294	24185
3	30500	0.70609	21536
4	30500	0.62875	19177
5	30500	0.55989	17077
		NPV	9233
ans 1		NPV	Ranking
	Machine A	-46425.50	3
	Machine B	7424.47	2
	Machine C	9233.44	1
ans b	Annuaized NPV=NPV/life of the machine
		NPV	Life	APNP=NPV/life
	Machine A	-46426	6	-7737.58
	Machine B	7424	4	1856.12
	Machine C	9233	5	1846.69
Ans 3	As per nPV Machine C gives highest NPV and as per ANPV Machine B
	gives highest ANPV. Hence we should select Machine B, as ANPV is highest in it
If any doubt please comment