Question

Lane Industries is considering the replacement of one of its machines. Several alternatives are under consideration. The relevant cash flows associated with each are shown in the following table. The firm's cost of capital is 15%. Cash inflows Initial Inv Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Press A Press B Press C S106,250 $75,000 $162,500 $22,500 S15,000 $62,500 $22,500 $17,500 $37,500 $22,500 $20,000 $25,000 $22,500 $22,500 $25,000 S22,500 S25,000 S25,000 S22,500 S31,250 $37,500 Year S $22,500 $62,500 $22,500 $50,000 Calculate the NPV of each machine and evaluate their acceptability based on NPV; rank them from best to worst using NPV.

Answer 1

		Press A		Press B		Press C
Year	PVF at 15%	Cashflows	PV of CF	Cashflows	PV of CF	Cashflows	PV of CF
0	1	-106250	-106250	-75000	-75000	-162500	-162500
1	0.869565	22500	19565.22	15000	13043.48	62500	54347.826
2	0.756144	22500	17013.23	17500	13232.51	37500	28355.388
3	0.657516	22500	14794.12	20000	13150.32	25000	16437.906
4	0.571753	22500	12864.45	22500	12864.45	25000	14293.831
5	0.497177	22500	11186.48	25000	12429.42	25000	12429.418
6	0.432328	22500	9727.371	31250	13510.24	37500	16212.285
7	0.375937	22500	8458.583	0	0	50000	18796.852
8	0.326902	22500	7355.29	0	0	62500	20431.361
NET PRESENT VALUE			-5285		3230		18805
RANKING			III		II		I