Hook Industries is considering the replacement of one of its old drill presses.
ID: 2762713 • 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 12%. Calculate the net present value (NPV) of each press. Using NPV, evaluate the acceptability of each press. Rank the presses from best to worst using NPV. Calculate the profitability index (PI) for each press. Rank the presses front best to worst using PI.Explanation / Answer
Statement showing calculation of NPV Press A Press B Press C Year PFV @12% Amount PV(Amt*PFV) Amount PV(Amt*PFV) Amount PV(Amt*PFV) - 0.89 (84,900.00) (75,803.57) (60,100.00) (53,660.71) (130,100.00) (116,160.71) 1.00 0.80 17,800.00 14,190.05 12,400.00 11,071.43 50,200.00 44,821.43 2.00 0.71 17,800.00 12,669.69 13,600.00 12,142.86 30,000.00 26,785.71 3.00 0.64 17,800.00 11,312.22 16,200.00 14,464.29 20,100.00 17,946.43 4.00 0.57 17,800.00 10,100.20 18,000.00 16,071.43 19,800.00 17,678.57 5.00 0.51 17,800.00 9,018.03 20,400.00 18,214.29 20,300.00 18,125.00 6.00 0.45 17,800.00 8,051.82 24,900.00 22,232.14 29,800.00 26,607.14 7.00 0.40 17,800.00 7,189.12 - 40,200.00 35,892.86 8.00 0.36 17,800.00 6,418.86 - 49,700.00 44,375.00 NPV 3,146.42 40,535.71 116,071.43 RANK III II I PI= PV of future cash flow/Initial Investment PV of future cash flow = sum of PV of cash flow from yr 1 to 8 PI RANK Press A = $78,950 = 0.93 III $84,900 Press B = 94,196.43 = 1.57 II 60100 Press C = 232,232.14 = 1.79 I 130100
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