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 cost of capital of 11.7% to evaluate each of them. The initial investment and annual cash inflows over the life of each machine are shown in the following table. Machine A MachineB Machine C Initial investment 91,900 64,700 100,200 Year Cash inflows 1 11,000 10,200 30,500 2 11,000 19,900 30,500 3 11,000 30,200 30,500 4 11,000 39,500 30,500 5 11,000 - 30,500 6 11,000 - - 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 (a) and (b).Which machine would you recommend that the firm acquire?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 4CE: Manzer Enterprises is considering two independent investments: A new automated materials handling...

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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 cost of capital of 11.7% to evaluate each of them. The initial investment and annual cash inflows over the life of each machine are shown in the following table.

Machine A MachineB Machine C

Initial investment 91,900 64,700 100,200

Year Cash inflows

1 11,000 10,200 30,500

2 11,000 19,900 30,500

3 11,000 30,200 30,500

4 11,000 39,500 30,500

5 11,000 - 30,500

6 11,000 - -

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 (a) and (b).Which machine would you recommend that the firm acquire?

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