Principles of Managerial Finance

(Dana P.) #1

444 PART 3 Long-Term Investment Decisions


Step 2 Divide the net present value of each project having a positive NPV by the
present value interest factor for an annuity at the given cost of capital
and the project’s life to get the annualized net present value for each
project j, ANPVj, as shown below:

ANPVj (10.6)

Step 3 Select the project that has the highest ANPV.

EXAMPLE By using the AT Company data presented earlier for projects X and Y, we can
apply the three-step ANPV approach as follows:

Step 1 The net present values of projects X and Y discounted at 10%—as calcu-
lated in the preceding example for a single purchase of each asset—are

NPVX $11,248 (calculator/spreadsheet value$11,277.24)

NPVY $18,985 (calculator/spreadsheet value$19,013.27)

Step 2 Table Use Calculate the annualized net present value for each project
by applying Equation 10.6 to the NPVs.

ANPVX$$


4


,


5


2


3


ANPVY$


4


,


3


5


9


Calculator Use The keystrokes required to find the ANPV on a financial
calculator are identical to those demonstrated in Chapter 4 for finding the
annual payments on an installment loan. These keystrokes are shown
below for project X and for project Y. The resulting ANPVs for projects
X and Y are $4,534.74 and $4,365.59, respectively.

$18,985



4.355

$18,985

PVIFA10%,6yrs

$11,248



2.487

$11,248

PVIFA10%,3yrs

NPVj
PVIFAk,nj

4534.74

11277.24 PV
N

CPT
PMT

I

3
10

Solution

Input Function

4365.59

19013.27 PV
N

CPT
PMT

I

6
10

Solution

Input Function

Project X Project Y
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