HI - I have been trying to do this for a bit and I can\'t seem to find the answe

Question

HI - I have been trying to do this for a bit and I can't seem to find the answer. I am hoping that you can assist me. I would really like to understand.  

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 9%  

Any assistance would be much appreciated! Thanks!

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.

I have tried the NVP formula, the PV formula and subtracting the orignal amount, but still. I am sure I am doing something wrong.

Opp Cost 9% Press A Press B Press C Initial investment $85,500 $59,800 $129,900 Year 1 $18,300 $12,500 $50,500 2 $18,300 $13,600 $30,300 3 $18,300 $15,500 $20,200 4 $18,300 $17,900 $20,100 5 $18,300 $19,800 $20,200 6 $18,300 $24,900 $29,700 7 $18,300 $0 $40,000 8 $18,300 $0 $49,600

Explanation / Answer

NPV is calculated by discounting the cashflows

PV = C/(1+r)^n

C - Cashflow

r - Discount rate

n - years to the cashflow

a.

NPV of press A:

NPV of Press B:

Press C:

b.

All the three can be accepted, as the NPV for all three is positive.

c.

Press C > Press A > Press B. NPV of C is greater than A greater than B.

d.

Profitability index = (NPV + Initial investment) / Initial investment

Press A:

PI = (15787.19+85500)/85500 = 1.18

Press B:

PI = (15480.09+59800)/59800 = 1.26

Press C:

PI = (49382.32+129900)/129900 = 1.38

d.

Using PI

Press C > Press B > Press A

PI of Press C greater than B greater than A.

Rate 9.00% Year Cashflow (A) Discount rate = 1/(1+r)^(n) Present value of cashflow = A*discount rate 0 -85500.00 1.00 -85500.00 1 18300.00 0.92 16788.99 2 18300.00 0.84 15402.74 3 18300.00 0.77 14130.96 4 18300.00 0.71 12964.18 5 18300.00 0.65 11893.74 6 18300.00 0.60 10911.69 7 18300.00 0.55 10010.73 8 18300.00 0.50 9184.15 NPV 15787.19

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