Evans Industries wishes to select the best of three possible machines, each of w
ID: 2715058 • Letter: E
Question
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 intial investment and annual cash inflows over the life of each machine are shown in the following table.
1
30000
a. Calculate the NPV for each machine over its life. Rank the machine 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? Why?
Machine A Machine B Machine c Initial Investment (CF0) -$92,000 -$65,000 -$100,500 Year (t) Cash Inflows (CFt)1
$12000 $10000 $30000 2 12000 20000 30000 3 12000 30000 30000 4 12000 40000 30000 5 12000 -30000
6 12000 - -Explanation / Answer
Machine A Machine B Machine C Year Particulars Amount DcF@12% Discounted Flows Amount DcF@12% Discounted Flows Amount DcF@12% Discounted Flows 0 Outflows -92000 -92000 -65000 -65000 -100500 -100500 1 Inflows 12000 0.892857 10714.28571 10000 0.892857 8928.571429 30000 0.892857 26785.71429 2 Inflows 12000 0.797194 9566.326531 20000 0.797194 15943.87755 30000 0.797194 23915.81633 3 Inflows 12000 0.71178 8541.362974 30000 0.71178 21353.40743 30000 0.71178 21353.40743 4 Inflows 12000 0.635518 7626.216941 40000 0.635518 25420.72314 30000 0.635518 19065.54235 5 Inflows 12000 0.567427 6809.122269 0.567427 0 30000 0.567427 17022.80567 6 Inflows 12000 0.506631 6079.573454 0.506631 0 0.506631 0 NPV 4.111407 -42663.11212 3.037349 6646.57955 3.604776 7643.28607 Ranking on Basis of NPV 3 2 1 Annualised NPV=NPV/Sum of Discounted Factor -10376.7661 2188.282872 2120.32194 Ranking on Basis of Annual NPV 3 1 2 Would Recommend Machine B as it Provides a Better Annual Return
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