Warehouse Systems Enterprises (WSE) designed a new inventory management system. WSE managers must choose among three alternative courses of action: (1) WSE can sell the design of the new system to a warehouse and receive payment over 3 years; (2) WSE can license the design to other warehouses for a period of 5 years; or (3) WSE can manufacture or market the equipment itself with expected cash inflows for 6 years. WSE’s cost of capital is 15%. The expected cash flows are shown in the following table.

a. Calculate the net present value (NPV) for each of the alternatives, and rank them in order of acceptability based on the NPVs.
b. Calculate the annualized net present value (ANPV) for each of the alternatives, and rank them in order of acceptability based on the NPVs.
c. Which alternative should WSE accept? Why?

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Alternative Initial investment (CF) Year (t) 1 2 3 4 5 6 Sell $230,000 License $230,000 Cash inflows (CF,) $200,000 240,000 190,000 1 $250,000 100,000 90,000 65,000 55,000 Manufacture $440,000 $195,000 195,000 195,000 195,000 195,000 195,000