Hoook comp.  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%.       Machine A Machine B Machine C Initial Investment   85,000 $ 60,000 $ 130,000 $ Year Cash Inflows 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   Calculate the net present value (NPV) of each press. Using NPV, evaluate the acceptability of each press. Rank the presses from best to worst using NPV.

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Hoook comp.  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%.

 

 

 

Machine A

Machine B

Machine C

Initial Investment

 

85,000 $

60,000 $

130,000 $

Year

Cash Inflows

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

 

  1. Calculate the net present value (NPV) of each press.
  2. Using NPV, evaluate the acceptability of each press.
  3. Rank the presses from best to worst using NPV.
  4. Calculate the profitability index (PI) for each press.
  5. Rank the presses from best to worst using PI.
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