Question

P10–10 NPV: 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. The firm’s cost of capital is 15%.

	Machine A	Machine B	Machine C
Initial investment (CF0)	−$85,000	−$60,000	−$130,000
Year (t)	Cash inflows (CFt)
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

1. Calculate the net present value (NPV) of each press.
2. Using NPV, evaluate the acceptability of each press.
3. Rank the presses from best to worst, using NPV.
4. Calculate the profitability index (PI) for each press.
5. Rank the presses from best to worst, using PI.

Answer 1

Accept B and C. Reject A.