Question

 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:

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. The​ firm's cost of capital is

1010​%.

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

Initial investment	84500	60100	130400
Year
1	18200	12100	49900
2	18200	13700	30200
3	18200	15500	19800
4	18200	18400	19500
5	18200	19700	19800
6	18200	24500	29800
7	18200	0	39800
8	18200	0	50300

Answer 1

a.Press 1

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$84,500. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the cost of capital of 10%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 10% cost of capital is $12,595.66.

Press 2

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$60,100. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the cost of capital of 10%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 10% cost of capital is $12,496.90.

Press 3

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$130,400. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the cost of capital of 10%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 10% cost of capital is $41,121.69.

b.All three presses can be accepted since they generate a positive net present value.

c.Ranking the presses using NPV:

1.Press 3

2.Press 1

3.Press 2

d. Press 1

Profitability index is calculated using the below formula:

Profitability Index= NPV + Initial investment/ Initial investment

= $12,595.66+ $84,500/ $84,500

= $97,095.66/ $84,500

=1.1491 1.15.

Press 2

Profitability index is calculated using the below formula:

Profitability Index= NPV + Initial investment/ Initial investment

= $12,496.90+ $60,100/ $60,100

= $72,596.90/ $60,100

= 1.2079 1.21.

Press 3

Profitability index is calculated using the below formula:

Profitability Index= NPV + Initial investment/ Initial investment

= $41,121.69 + $130,400/ $130,400

= $171,521.69/ $130,400

= 1.3154   1.32.