Principles of Managerial Finance

a. Calculate the NPV for each project over its life. Rank the projects in descend-

ing order on the basis of NPV.

b. Use the annualized net present value (ANPV)approach to evaluate and rank

the projects in descending order on the basis of ANPV.

c. Compare and contrast your findings in parts aand b.Which project would

you recommend that the firm purchase? Why?

10–13 Unequal lives—ANPV approach JBL Co. has designed a new conveyor system.

Management must choose among three alternative courses of action: (1) The

firm can sell the design outright to another corporation with payment over 2

years. (2) It can license the design to another manufacturer for a period of 5

years, its likely product life. (3) It can manufacture and market the system itself.

The company has a cost of capital of 12%. Cash flows associated with each

alternative are as follows:

a. Calculate the net present value of each alternative and rank the alternatives

on the basis of NPV.

b. Calculate the annualized net present value (ANPV) of each alternative and

rank them accordingly.

c. Why is ANPV preferred over NPV when ranking projects with unequal lives?

Alternative Sell License Manufacture

Initial investment (CF 0 ) $200,000 $200,000 $450,000

Year (t) Cash inflows (CFt)

1 $200,000 $250,000 $200,000

2 250,000 100,000 250,000

3 — 80,000 200,000

4 — 60,000 200,000

5 — 40,000 200,000

6 — — 200,000

Project X Project Y Project Z

Initial investment (CF 0 ) $78,000 $52,000 $66,000

Year (t) Cash inflows (CFt)

1 $17,000 $28,000 $15,000

2 25,000 38,000 15,000

3 33,000 — 15,000

4 41,000 — 15,000

5 — — 15,000

6 — — 15,000

7 — — 15,000

8 — — 15,000

CHAPTER 10 Risk and Refinements in Capital Budgeting 459

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