Hook industries is considering the replacement of one of its old drill presses.
ID: 2720251 • Letter: H
Question
Hook industries is considering the replacement of one of its old drill presses. Three alternative replacement presses are under consideration. The relevant cash flows associated with each are shown in the following table. The firm's cost of capital is 15%
Press A
Press B
Press C
Initial Investment
$85,000
$60,000
$130,000
Year
Cash Inflows
Cash Inflows
Cash Inflows
1
18,000
12,000
50,000
2
18,000
14,000
30,000
3
18,000
16,000
20,000
4
18,000
18,000
20,000
5
18,000
20,000
20,000
6
18,000
25,000
30,000
7
18,000
-
40,000
8
18,000
-
50,000
Calculate Net Present Value of each press
Using NPV, evaluate the acceptability of the press
Rank the presses from best to worst using NPV
Calculate the profitability index for each press
Rank the presses from best to worst using PI.
Press A
Press B
Press C
Initial Investment
$85,000
$60,000
$130,000
Year
Cash Inflows
Cash Inflows
Cash Inflows
1
18,000
12,000
50,000
2
18,000
14,000
30,000
3
18,000
16,000
20,000
4
18,000
18,000
20,000
5
18,000
20,000
20,000
6
18,000
25,000
30,000
7
18,000
-
40,000
8
18,000
-
50,000
Explanation / Answer
Calculate Net Present Value of each press
Using NPV, evaluate the acceptability of the press
As per NPV we should accept the positive NPV, in the above case we find Press B & Press C are positive NPV and both are acceptable. But from the point of view of mutual exclusive , we should select Project C as its NPV is higher
Rank the presses from best to worst using NPV
Ranking from best to worst :
Press C
Press B
Press A
Calculate the profitability index for each press
Rank the presses from best to worst using PI.
Ranking from best to worst :
Press C
Press B
Press A
Working
Press A Press B Press C NPV (4,228.06) 2,584.47 15,044.20Related Questions
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