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; this alternative will result in 6 years of cash inflows. The company has a cost of capital of 11.4%. Cash flows associated with each alternative are as shown in the following table. Alternative Sell License Manufacture Initial investment (CF0) $199,000 $200,600 $449,000 Year (t ) Cash inflows (CFt) 1 $199,500 $250,600 $200,300 2 250,400 100,700 255,000 3 — 79,700 200,300 4 — 59,700 200,300 5 — 40,500 200,300 6 — — 200,300 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?
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; this alternative will result in 6 years of cash inflows. The company has a cost of capital of 11.4%. Cash flows associated with each alternative are as shown in the following table. Alternative Sell License Manufacture Initial investment (CF0) $199,000 $200,600 $449,000 Year (t ) Cash inflows (CFt) 1 $199,500 $250,600 $200,300 2 250,400 100,700 255,000 3 — 79,700 200,300 4 — 59,700 200,300 5 — 40,500 200,300 6 — — 200,300 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?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
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; this alternative will result in 6 years of cash inflows . The company has a cost of capital of 11.4%.
Cash flows associated with each alternative are as shown in the following table.
Cash flows associated with each alternative are as shown in the following table.
|
Alternative
|
Sell
|
License
|
Manufacture
|
|
|
Initial investment
(CF0)
|
$199,000
|
$200,600
|
$449,000
|
|
|
Year
(t )
|
Cash inflows
(CFt)
|
|
||
|
1
|
$199,500
|
$250,600
|
$200,300
|
|
|
2
|
250,400
|
100,700
|
255,000
|
|
|
3
|
—
|
79,700
|
200,300
|
|
|
4
|
—
|
59,700
|
200,300
|
|
|
5
|
—
|
40,500
|
200,300
|
|
|
6
|
—
|
—
|
200,300
|
|
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?
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