Rollerblade, a maker of skating gear, is evaluating two alternative presses. Press A costs $88,000, has a 4-year life, and is expected to generate annual cash inflows of $30,100 in each of the 4 years. Press B costs $122,000, has an 8-year life, and is expected to generate annual cash inflows of $24,600 in each of 8 years. The cost of replacement for A is $96,000, and the replacement press will generate cash inflows of $30,100 for another 4 years. Rollerblade uses a 12% cost of capital. Which press should be chosen?

The press to be chosen is totally dependent on the positive and higher NPV comparatively. Net…

Answered: Rollerblade, a maker of skating gear,…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section10.A: Mutually Exclusive Investments Having Unequal Lives

Problem 2P

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Rollerblade, a maker of skating gear, is evaluating two alternative presses.
Press A costs $88,000, has a 4-year life, and is expected to generate annual cash inflows of $30,100 in each of the 4 years.
Press B costs $122,000, has an 8-year life, and is expected to generate annual cash inflows of $24,600 in each of 8 years.
The cost of replacement for A is $96,000, and the replacement press will generate cash inflows of $30,100 for another 4 years. Rollerblade uses a 12% cost of capital.
Which press should be chosen?

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