Question

P10-10 (similar to)

NPVlong dash—Mutually

exclusive projects   Hook Industries is considering the replacement of one of its old metal stamping machines. Three alternative replacement machines are under consideration. The relevant cash flows associated with each are shown in the following​ table:

LOADING...

. The​ firm's cost of capital is

8​%.

a.  Calculate the net present value

​(NPV​)

of each press.

b.  Using​ NPV, evaluate the acceptability of each press.

c.  Rank the presses from best to worst using NPV.

d.  Calculate the profitability index​ (PI) for each press.

e.  Rank the presses from best to worst using PI.

a. The NPV of press A is

​$nothing.

Initial investment  

$85,100   $59,700   $130,200
Year          
1   $18,500   $12,000   $50,100
2   $18,500   $13,700   $30,000
3   $18,500   $15,700   $20,200
4   $18,500   $17,700   $19,700
5   $18,500   $19,700   $19,900
6   $18,500   $25,300   $30,000
7   $18,500   $0   $40,200
8   $18,500   $0   $50,300

  ​(Round to the nearest​ cent.)

Answer 1

a
Press A
Discount rate	0.08
Year	0	1	2	3	4	5	6	7	8
Cash flow stream	-85100	18500	18500	18500	18500	18500	18500	18500	18500
Discounting factor	1	1.08	1.1664	1.259712	1.360489	1.469328	1.586874	1.713824	1.85093
Discounted cash flows project	-85100	17129.63	15860.77	14685.9	13598.052	12590.79	11658.14	10794.57	9994.974
NPV = Sum of discounted cash flows
NPV Press A =	21212.82
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Press B
Discount rate	0.08
Year	0	1	2	3	4	5	6
Cash flow stream	-59700	12000	13700	15700	17700	19700	25300
Discounting factor	1	1.08	1.1664	1.259712	1.360489	1.469328	1.586874
Discounted cash flows project	-59700	11111.11	11745.54	12463.17	13010.028	13407.49	15943.29
NPV = Sum of discounted cash flows
NPV Press B =	17980.63
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Press C
Discount rate	0.08
Year	0.00%	1	2	3	4	5	6	7	8
Cash flow stream	-130200	50100	30000	20200	19700	19900	30000	40200	50300
Discounting factor	1	1.08	1.1664	1.259712	1.360489	1.469328	1.586874	1.713824	1.85093
Discounted cash flows project	-130200	46388.89	25720.16	16035.41	14480.088	13543.61	18905.09	23456.31	27175.52
NPV = Sum of discounted cash flows
NPV Press C =	55505.09
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

b

all 3 projects are acceptable as NPVs are positive

c

Press C - rank 1

Press A - rank 2

Press B - rank 3

d

Press A

PI= (NPV+initial inv.)/initial inv.

=(21212.82+85100)/85100

1.25

Press B

PI= (NPV+initial inv.)/initial inv.

=(17980.63+59700)/59700

1.3

Press C

PI= (NPV+initial inv.)/initial inv.

=(55505.09+130200)/130200

1.43

e

Press C - rank 1

Press A - rank 2

Press B - rank 3