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; or (3) it can manufacture and market the system itself, an alternative that will
result in 6 years of cash inflows. The company has a cost of capital of 12%. Cash
flows associated with each alternative are as shown in the following table.
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
c. Why is ANPV preferred over NPV when ranking projects with unequal lives?