Question

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:

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. The​ firm's cost of capital is

1414​%.

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 comma 90084,900	​$60 comma 30060,300		​$130 comma 500130,500
Year​ (t)	Cash inflows ​(CF Subscript tCFt​)
1	​$17 comma 80017,800	​$12 comma 50012,500	​$49 comma 60049,600
2	​$17 comma 80017,800	​$14 comma 40014,400	​$29 comma 90029,900
3	​$17 comma 80017,800	​$16 comma 50016,500	​$19 comma 90019,900
4	​$17 comma 80017,800	​$17 comma 90017,900	​$19 comma 60019,600
5	​$17 comma 80017,800	​$20 comma 00020,000	​$20 comma 00020,000
6	​$17 comma 80017,800	​$25 comma 50025,500	​$30 comma 40030,400
7	​$17 comma 80017,800	long dash—	​$40 comma 10040,100
8	​$17 comma 80017,800	long dash—	​$50 comma 300

Answer 1

NPV		Machine-A		Machine-B		Machine-C
Year	PVF at 14%	Cashflows	PV of Cf	Cashflows	PV of CF	Cashflows	PV f CF
1	0.877193	17800	15614.04	12500	10964.91	49600	43508.77
2	0.769468	17800	13696.52	14400	11080.33	29900	23007.08
3	0.674972	17800	12014.49	16500	11137.03	19900	13431.93
4	0.59208	17800	10539.03	17900	10598.24	19600	11604.77
5	0.519369	17800	9244.762	20000	10387.37	20000	10387.37
6	0.455587	17800	8109.441	25500	11617.46	30400	13849.83
7	0.399637	17800	7113.544		0	40100	16025.46
8	0.350559	17800	6239.951		0	50300	17633.12
Present value of Inflows			82571		65785		149448
Less: Investment			84900		60300		130500
NPV			-2329		5485		18948
Rank			III		II		I
Machine-C shall be accepted
Profitability Index		Machine-A		Machine-B		Machine-C
Year	PVF at 14%	Cashflows	PV of Cf	Cashflows	PV of CF	Cashflows	PV f CF
1	0.877193	17800	15614.04	12500	10964.91	49600	43508.77
2	0.769468	17800	13696.52	14400	11080.33	29900	23007.08
3	0.674972	17800	12014.49	16500	11137.03	19900	13431.93
4	0.59208	17800	10539.03	17900	10598.24	19600	11604.77
5	0.519369	17800	9244.762	20000	10387.37	20000	10387.37
6	0.455587	17800	8109.441	25500	11617.46	30400	13849.83
7	0.399637	17800	7113.544		0	40100	16025.46
8	0.350559	17800	6239.951		0	50300	17633.12
Present value of Inflows			82571		65785		149448
Divide: Investment			84900		60300		130500
Profitability Index			0.97		1.09		115
Rank			III		II		I
Machine-C shall be accepted