Principles of Managerial Finance

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