Question

NPV - 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 …. The​ firm's cost of capital is 13​%.

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.

                                            

	Machine A	Machine B	Machine C
Initial investment ​(CF 0CF0​)	​$85,400	​$59,500	​$129,500
Year​ (t)	Cash inflows ​(CF Subscript tCFt​)
1	​$17,800	​$11,500	​$50,200
2	​$17,800	​$13,500	​$30,400
3	​$17,800	​$15,600	​$19,600
4	​$17,800	​$18,500	​$20,200
5	​$17,800	​$19,700	​$19,500
6	​$17,800	​$24,500	​$29,700
7	​$17,800	—	​$39,600
8	​$17,800	—	​$50,000

Answer 1

Computan of NPV
Machien A		Machine B	Machine -C
Year	Net Cash Flows	PVF @13%	Discounted cash flows		Year	Net Cash Flows	PVF @13%	Discounted cash flows	Year	Net Cash Flows	PVF @13%	Discounted cash flows
0	-85400	1	-85,400.00		0	-59500	1	-59,500	0	-129500	1	-129,500
1	17800	0.885	15,753.00		1	11500	0.885	10,178	1	50200	0.885	44,427
2	17800	0.783	13,937.40		2	13500	0.783	10,571	2	30400	0.783	23,803
3	17800	0.693	12,335.40		3	15600	0.693	10,811	3	19600	0.693	13,583
4	17800	0.613	10,911.40		4	18500	0.613	11,341	4	20200	0.613	12,383
5	17800	0.543	9,665.40		5	19700	0.543	10,697	5	19500	0.543	10,589
6	17800	0.480	8,544.00		6	24500	0.480	11,760	6	29700	0.480	14,256
7	17800	0.425	7,565.00					-	7	39600	0.425	16,830
8	17800	0.376	6,692.80					-	8	50000	0.376	18,800
	NPV	4.40			NPV	5,856.40		NPV	25,170.10

Part-b: for all the Machine NPV is Positive , however Machine C is higher NPV. Hence it's better to accept Machine C

Part-C:- Rank
	NPV	Rank
Machine A	4.40	III
Machine B	5,856.40	II
Machine C	25,170.10	I

Part-:-d- Computation of PI
	PV of Inflow	Initial investment		PI
Machine A	85,404.00	85400		1.00
Machine B	65,356.00	59500		1.10
Machine C	154,670.00	129500		1.19

Part-e:- Rank
	PI	Rank
Machine A	1.00	III
Machine B	1.10	II
Machine C	1.19	I