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

Clong dash—are

equally risky. The firm plans to use a cost of capital of

12.4 %12.4%

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 A	Machine B	Machine C
Initial investment ​(CF 0CF0​)	​$91 comma 00091,000	​$64 comma 80064,800	​$100 comma 300100,300
Year ​(tt ​)	Cash inflows ​(CF Subscript tCFt​)
1	​$12 comma 70012,700	​$10 comma 10010,100	​$29 comma 00029,000
2	12 comma 70012,700	20 comma 10020,100	29 comma 00029,000
3	12 comma 70012,700	29 comma 10029,100	29 comma 00029,000
4	12 comma 70012,700	40 comma 90040,900	29 comma 00029,000
5	12 comma 70012,700	long dash—	29 comma 00029,000
6	12 comma 70012,700	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

We can calculate the desired results using the excel sheet as follows:

Formulas used in the excel Sheet are:

ANPV is calculated as follows:

= NPV / Total Of PV factor of Machine uptill Cash inflows are received

a) Ranking of Machines in Decending order of their NPV

Machine	NPV	Rank
Machine B	$   6,212.63	Rank 1
Machine C	$ 3,210.85	Rank 2
Machine A	$ -39,371.34	Rank 3

b) Ranking of Machines in Decending order of their ANPV

Machine	ANPV	Rank
Machine B	$   2,062.67	Rank 1
Machine C	$ 899.56	Rank 2
Machine A	$ -9,684.85	Rank 3

c) According to the NPV and ANPV method the Machine B is the best suitable among all the 3 Machines as it has Rank 1 in both the approaches. Machine B would be recommended.

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