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:. The​ firm's cost of capital is 9​%.

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​)	​$84,800	​$59,900	​$129,500
Year​ (t)	Cash inflows ​(CF Subscript tCFt​)
1	​$17,800	​$11,600	​$50,500
2	​$17,800	​$14,300	​$30,200
3	​$17,800	​$15,600	​$20,500
4	​$17,800	​$18,300	​$20,200
5	​$17 comma 80017,800	​$20 comma 50020,500	​$19 comma 70019,700
6	​$17,800	​$25,000	​$30,200
7	​$17,800	l	​$39,900
8	​$17,800	l	​$49500

Answer 1

	Machine A
Year	CashFlows(in Million $)	Discounting Factor [1/(1.09^year)]	PV of Cash Flows (cash flow*discounting factor)
0	-84800	1	-84800
1	17800	0.917431193	16330.27523
2	17800	0.841679993	14981.90388
3	17800	0.77218348	13744.86595
4	17800	0.708425211	12609.96876
5	17800	0.649931386	11568.77868
6	17800	0.596267327	10613.55842
7	17800	0.547034245	9737.209558
8	17800	0.50186628	8933.219778
		NPV = Sum of above PVs	13719.78024
	PI = Sum of PVs of year 1 to 9/PV of year 0	98519.78/84800 =	1.161789858

	Machine B
Year	CashFlows(in Million $)	Discounting Factor [1/(1.09^year)]	PV of Cash Flows (cash flow*discounting factor)
0	-59900	1	-59900
1	11600	0.917431193	10642.20183
2	14300	0.841679993	12036.0239
3	15600	0.77218348	12046.06229
4	18300	0.708425211	12964.18136
5	20500	0.649931386	13323.59342
6	25000	0.596267327	14906.68317
7	0	0.547034245	0
8	0	0.50186628	0
		NPV = Sum of above PVs	16018.74598
	PI = Sum of PVs of year 1 to 9/PV of year 0	75918.75/59900 =	1.267424808

	Machine C
Year	CashFlows(in Million $)	Discounting Factor [1/(1.09^year)]	PV of Cash Flows (cash flow*discounting factor)
0	-129500	1	-129500
1	50500	0.917431193	46330.27523
2	30200	0.841679993	25418.7358
3	20500	0.77218348	15829.76134
4	20200	0.708425211	14310.18926
5	19700	0.649931386	12803.64831
6	30200	0.596267327	18007.27327
7	39900	0.547034245	21826.66637
8	49500	0.50186628	24842.38084
		NPV = Sum of above PVs	49868.93043
	PI = Sum of PVs of year 1 to 9/PV of year 0	179368.93/129500 =	1.385088266

b) NPV of ALL Machines is Positive. Therefore, Each one can be Accepted

c) & e)

Ranks Based on NPV & PI:

Both NPV & PI, Higher the Better. Therefore, Ranked Highest to Lowest.

Rank 1: Machine C Rank 2: Machine B Rank 3: Machine A