a. Find the risk-adjusted NPV for each project.
b. Which project, if any, would you recommend that the firm
undertake?10–11 Unequal lives—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 machines—A, B,
and C—are equally risky. The firm plans to use a 12% cost of capital to evaluate
each of them. The initial investment and annual cash inflows over the life of each
machine are shown in the following table.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 aand b.Which machine would
you recommend that the firm acquire? Why?10–12 Unequal lives—ANPV approach Portland Products is considering the purchase
of one of three mutually exclusive projects for increasing production efficiency.
The firm plans to use a 14% cost of capital to evaluate these equal-risk projects.
The initial investment and annual cash inflows over the life of each project are
shown in the following table.Machine A Machine B Machine CInitial investment (CF 0 ) $92,000 $65,000 $100,500Year (t) Cash inflows (CFt)1 $12,000 $10,000 $30,000
2 12,000 20,000 30,000
3 12,000 30,000 30,000
4 12,000 40,000 30,000
5 12,000 — 30,000
6 12,000 — —Risk Classes and RADRs
Risk-adjusted
Risk Class Description discount rate (RADR)I Lowest risk 10%
II Below-average risk 13
III Average risk 15
IV Above-average risk 19
V Highest risk 22458 PART 3 Long-Term Investment Decisions
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