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
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FIN 3004 Business Finance 

           Homework

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

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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