Hook Industries is considering replacement of one of its drill presses. Three substitute replacement presses are under consideration. Relevant cash flows associated with each are shown in the given table below. Firm’s cost of capital is 15%.
Press A Press B Press C
Initial Investment $85,000 $60,000 $130,000
Years Cash Flow
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
a. Compute the net present value of each press
b. Using NPV, find out the acceptability of each project
c. Rank project from best to worst by using NPV
d. Compute the profitability index (PI) for each press
e. Rank presses from best to worst by using PI.