NPV long dash— Mutually exclusive projects Hook Industries is considering the re
ID: 2796061 • Letter: N
Question
NPVlong dash—Mutually
exclusive projectsHook 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 13%
Initial investment A $84,700 B $60,000 C $130,000
(CF0CFO)
Year (t)
(CF Subscript tCFt)
1
$18 18,200 A
$12,500 B
$50,300 C
2
$18,200 A
$14,200 B
$30,200 C
3
$18,200 A
$15,900 B
$19,800 C
4
$18,200 A
$18,400 B
$20,000 C
5
$18,200 A
$19,700 B
$19,500 C
6
$18,200 A
$24,500 B
$30,300 C
7
$18,200 A
— B
$40,000 C
8
$1818,200 A
— B
$49,600 C
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.
Year (t)
Cash inflows(CF Subscript tCFt)
1
$18 18,200 A
$12,500 B
$50,300 C
2
$18,200 A
$14,200 B
$30,200 C
3
$18,200 A
$15,900 B
$19,800 C
4
$18,200 A
$18,400 B
$20,000 C
5
$18,200 A
$19,700 B
$19,500 C
6
$18,200 A
$24,500 B
$30,300 C
7
$18,200 A
— B
$40,000 C
8
$1818,200 A
— B
$49,600 C
Explanation / Answer
Net present values of the projects.
1. NPV of A: 84700 -{ 18200/(1.13)+ 18200/(1.13)2...+n}
NPV= 172037.62$
2. NPV of B= 60000 - {12500/(1.13)+ 14200/(1.13)2+....n}
NPV= 6947.366$
3. NPV of C= 130000- {50300/(1.13)+ 30200/(1.13)2+....n }
NPV= 24950$
All the three projects have positive NPV we will select the one with highest NPV.
Ranking would be 1st- A
2nd- C. 3rd- B
3. Profitability Index= 1+ NPV/initial outlay
A= 1+ 172037.62/84700= 3.031
B= 1+ 6947.366/60000= 1.1157
C= 1+ 24950/130000= 1.1919
Ranking as per PI
Best is A, worst is B, and C is good
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