Portland Products is considering the purchase of one of three mutually exclusive
ID: 2767227 • Letter: P
Question
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. a. Calculate the NPV for each project over its life. Rank the projects in descending 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 a and b. Which project would you recommend that the firm purchase? Why?Explanation / Answer
Project X
Year
Cash flow
PV Factor @ 14%
PV
0
-78,000
1
(78,000.00)
1
17,000
0.8772
14,912.28
2
25,000
0.7695
19,236.69
3
33,000
0.6750
22,274.06
4
41,000
0.5921
24,275.29
NPV
2,698.32
Project Y
Year
Cash flow
PV Factor @ 14%
PV
0
-52,000
1
(52,000.00)
1
28,000
0.8772
24,561.40
2
38,000
0.7695
29,239.77
NPV
1,801.17
Project Z
Year
Cash flow
PV Factor @ 14%
PV
0
-66,000
1
(66,000.00)
1
15,000
0.8772
13,157.89
2
15,000
0.7695
11,542.01
3
15,000
0.6750
10,124.57
4
15,000
0.5921
8,881.20
5
15,000
0.5194
7,790.53
6
15,000
0.4556
6,833.80
7
15,000
0.3996
5,994.56
8
41,000
0.3506
14,372.92
NPV
12,697.49
a.
Project X
Project Y
Project Z
NPV
2,698.32
1,801.17
12,697.49
Rank
II
III
I
b.
Project X
Project Y
Project Z
Sum Of PV
1.6467
4.6389
4.6389
Annualized NPV
1,638.66
388.28
2,737.20
Rank
II
III
I
c. The firm should purchase Project Z as it gives highest NPV and ANPV value.
Project X
Year
Cash flow
PV Factor @ 14%
PV
0
-78,000
1
(78,000.00)
1
17,000
0.8772
14,912.28
2
25,000
0.7695
19,236.69
3
33,000
0.6750
22,274.06
4
41,000
0.5921
24,275.29
NPV
2,698.32