Unequal lives-ANPV approach Portland Products is considering the purchase of one of three mutually exclusive projects for increasing production efficiency. The firm plans to use a 12.6% 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. (Click on the icon located on the top-right corner of the data table below in order to
copy its contents into a spreadsheet.)
Initial investment (CFO)
Year (t)
Cash inflows (CF$_t$)
Project X Project Y
Project Z
$78,000
$52,000
$66,000
1
$17,100
$27,900
$15,100
2
24,700
37,700
15,100
3
32,800
15,100
4
40,900
15,100
5
15,100
6
15,100
7
15,100
8
15,100
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 acquire?
