Three vice presidents of a manufacturing company have once again advocated their pet projects.
The VP Engineeringwants to invest in energy efficiency, and he claims his project will save the company $2 million per year for 20 years.
The VP Sales wants to invest in a new manufacturing operation that she claims has a NPV of $10 million.
The VP Operations wants to invest in newequipment thatwill provide benefits that will have a future value of $30 million in 10 years.
All departments have used standard techniques for preparing their estimates of the net benefits, and all have used the company’s hurdle rate of 10% to discount cash flows. Which proposal is the best?
Hint:
Three different conversions to NPV (actually the second one is already in NPV) so convert the first annuity to NPV and the third future value to NPV and compare to see which is best.