Chapter 7 240206521.xls.

ms_office
Atrill/Hurley
Financial Management for Decision Makers
Canadian Edition
Chapter 7
Problems and Cases
7.2
Year Machine 1 Machine 2 Machine 3
0 -200 -400 -600
1 150 150 140
2 125 140 130
3 130 120
4 120 120
5 110
6 100
7 90
8 70
Cost of capital 8%
Topic: Common-Period-of-Time and Equivalent-Annual-Annuity
Approaches
James Bay Geological Engineering Company (JBGEC) is considering buying
one of three earth-moving conveyors with the following investment
characteristics:
Project Cash Flows
($ thousands)
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Chapter 7 240206521.xls.ms_office
Machine 1 NPV =
Machine 2 NPV =
Machine 3 NPV =
Machine 1 NPV =
Machine 2 NPV =
Machine 3 NPV =
Machine 1 NPV =
Machine 2 NPV =
Machine 3 NPV =
Machine 1 PMT =
Machine 2 PMT =
Machine 3 PMT =
Step 1: Calculate the NPV for each machine:
Step 2: Convert the NPV for each project into an annual annuity stream over
its expected life.
(a) Use the common-period-of-time approach to determine which machine, if
any, should be acquired.
Step 1: Calculate the NPV for each machine:
Step 2: Calculate the NPV arising for each machine, over the shortest-
common-period-of-time (using the reinvestment assumption).
(b) Use the equivalent-annual-annuity approach to determine which
machine, if any, should be acquired.
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