Hook Industries is considering the replacement of one of its old drill presses.
ID: 2764185 • 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 15%
a. Calculate net present value (NPV) of each press
b. Using NPV, evaluate the acceptability of each press
c. Rank the presses from best to worst
d. Calculate the profitability index (PI) for each press
e. Rank the presses from best to worst using PI
Press A
Press B
Press C
Initial Investment
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
Press A
Press B
Press C
Initial Investment
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
Explanation / Answer
Solution..
a. Calculate net present value (NPV) of each press.
b. Using NPV, evaluation of the acceptability of each press.
Press A = Not Acceptable.
Press B = Acceptable.
Press C = Acceptable.
c. Rank the presses from best to worst
Rank 1 = Press C
Rank 2 = Press B
Wrost = Press A
d. Calculate the profitability index (PI) for each press.
Profitability Index = Present Value / Initial Investment Required
Press 1 PI
= $80,766 / $85,000 = 0.95%
Press 2 PI = $62,579.50 / $60,000 = 1.04
Press 3 PI = $145,034 / $130,000 = 1.11
e. Rank the presses from best to worst using PI.
Rank 1 = Press C
Rank 2 = Press B
Rank 3 = Press A
Year (t) Press A Press B Press C P.V Factore 15% Press A Press B Press C 0 (85,000.00) (60,000.00) (130,000.00) 1.0000 (85,000.00) (60,000.00) (130,000.00) 1 18,000.00 12,000.00 50,000.00 0.8695 15,651.00 10,434.00 43,475.00 2 18,000.00 14,000.00 30,000.00 0.7561 13,609.80 10,585.40 22,683.00 3 18,000.00 16,000.00 20,000.00 0.6575 11,835.00 10,520.00 13,150.00 4 18,000.00 18,000.00 20,000.00 0.5717 10,290.60 10,290.60 11,434.00 5 18,000.00 20,000.00 20,000.00 0.4971 8,947.80 9,942.00 9,942.00 6 18,000.00 25,000.00 30,000.00 0.4323 7,781.40 10,807.50 12,969.00 7 18,000.00 40,000.00 0.3759 6,766.20 - 15,036.00 8 18,000.00 50,000.00 0.3269 5,884.20 - 16,345.00 NPV 144,000.00 105,000.00 260,000.00 (4,234.00) 2,579.50 15,034.00Related Questions
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