Question

NPV - Mutually exclusive projects - Hook Industries is considering the replacement of one of its old metal stamping machines. Three alternatives replacement machines are under consideration. The relevant cash flows associated with each are shown in the following table.

	Machine A	Machine B	Machine C
Initial Investment(CF0)	$84,600	$60,500	$130,200
Year (t)		Cash inflows (CFt)
1	$18,000	$12,300	$49,900
2	$18,000	$13,500	$29,700
3	$18,000	$15,700	$20,400
4	$18,000	$18,000	$19,500
5	$18,000	$20,300	$20,000
6	$18,000	$24,600	$30,000
7	$18,000	-	$39,500
8	$18,000	-	$50,500

The firm's cost of capital is 8%.

a. calculate the net preset 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

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

? v L 1 ENG 02:11 23-02-2020 11 BW324 - X S fx BS BR BT BU BV BW BX BY BZ CA a 301 302 MACHINE A 303 HOOK 304 305 YEAR 306 CF 307 NOTE ON PV FACTOR 1/(1+r)^n 1/(1+0.08)^0 = 1 1/(1+0.08)^1 = 0.925926 1/(1+0.08)^2 = 0.857339 AND SO ON 308 309 310 311 312 313 314 MACHINE B MACHINEC PV FACTOR PV OF PV OF PV OF AT 8% CF CF CF с A D B*D C*D -84600 -60500 -130200 1.000000 -84600.00 -60500.00 -130200.00 18000 12300 49900 0.925926 16666.67 11388.89 46203.70 18000 13500 29700 0.857339 15432.10 11574.07 2 5462.96 18000 15700 20400 0.793832 14288.98 12463.17 16194.18 18000 18000 19500 0.735030 13230.54 13230.54 14333.08 18000 20300 20000 0.680583 12250.50 13815.84 13611.66 18000 24600 30000 0.630170 11343.05 15502.17 18905.09 18000 39500 0.583490 10502.83 23047.87 18000 50500 0.540269 9724.84 27283.58 NPV = 18839.50 17474.68 54842.13 00 OU AWNAO 315 316 317 318 319 AS ALL PROJECTS HAVE POSITIVE NPVS, ANY ONE CAN BE ACEEPTED. BUT BEST PROJECT IS WITH HIGHEST NPV MACHINE NPV RANK 54842.13 18839.50 17474.68 321 322 323 324 IRRnpvbeta RATIO PI PBP ARR invest, EAA Mi-np-ir REPLACEMENTS HPR GMAM EAC MACRS RELEVANT NPV BETA LEVERED REPLACEMENT BONC ... 1

? v L 1 ENG 02:11 23-02-2020 11 - X Fax BW339 BR BS BZ CA A BUBV NPV = W 18839.50 BY 54842.13 316 17474.68 317 318 b 319 320 AS ALL PROJECTS HAVE POSITIVE NPVS, ANY ONE CAN BE ACEEPTED. BUT BEST PROJECT IS WITH HIGHEST NPV MACHINE NPV RANK 54842.13 18839.50 17474.68 321 322 323 325 PI = 1 + (NPV/INVESTMENT) 326 327 328 MACHINE PI 329 1.22 1.29 1.42 330 331 332 333 MACHINE PI RANK 334 335 336 1.42 1.29 1.22 M A 338 339 IRRnpvbeta RATIO PI PBP ARR invest, EAA Mi-np-ir REPLACEMENTS HPR GMAM EAC MACRS RELEVANT NPV BETA LEVERED REPLACEMENT BONC ... 1