Reference no: EM133000541
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%.
Press A Press B Press 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
(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 worse using NPV.
(d). Calculate the profitability index (PI) for each press.
(e). Rank the presses from best to worse using PI.