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 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. Calculate the profitability index (PI) for each press. Rank the presses from best to worst using PI.
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 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. Calculate the profitability index (PI) for each press. Rank the presses from best to worst using PI.
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 11PA: Gallant Sports s considering the purchase of a new rock-climbing facility. The company estimates...
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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 |
|
||
|
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.
- Calculate the profitability index (PI) for each press.
- Rank the presses from best to worst using PI.
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