Question

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: LOADING.... The​ firm's cost of capital is 12​%

	Machine A	Machine B	Machine C
Initial investment	85100	60000	129800
Year		Cash Flows
1	18300	12500	49500
2	18300	13900	30200
3	18300	15800	20500
4	18300	17900	20500
5	18300	19800	19600
6	18300	25500	30000
7	18300	0	39900
8	18300	0	49600

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.

Answer 1

a. the NPV of machine A is :

CF0 = ($85,100)

CF1 TO CF8 IS $18,300

So, the NPV is :

= ($85,100) + $18,300/1.12 + ..... $18,300/1.12^8

= $5807.8077

Similarly, the NPV for machine B is :

= $9017.756

Simialrly, the NPV for machine C is :

= $30,493.1412

B. Since, all the projects have poistive NPV all the projects should be accepted.

C. Rankings are :

First rank : project C as it has the highest NPV

2nd rank : project B

3rd rank : project A

D. The profitability index are:

A : $85,100 + NPV/ initial investment

= $85,100 + $5807.8077/ $85,100

=1.0682

Similarly, the profitability index for Machine B is :

= 1.1503

The PI for machine C is :

= 1.2349

E. Rankings are :

First rank : machine C as it has the highest PI

2nd rank : machine B and 3rd rank machine A.