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Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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2- Bell Manufacturing Inc. 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 20,000 20,000 20,000 30,000 40,000 50,000 3 18,000 16,000 4 18,000 18,000 5 18,000 20,000 6 18,000 18,000 25,000 7 8 18,000 ----- 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 worst using NPV. d. Calculate the profitability index (PI) for each press. e. Rank the presses from best to worst using PI.
Transcribed Image Text:2- Bell Manufacturing Inc. 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 20,000 20,000 20,000 30,000 40,000 50,000 3 18,000 16,000 4 18,000 18,000 5 18,000 20,000 6 18,000 18,000 25,000 7 8 18,000 ----- 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 worst using NPV. d. Calculate the profitability index (PI) for each press. e. Rank the presses from best to worst using PI.
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