Scotty Manufacturing is considering the replacement of one of its machine tools. Three alternative replacement tools-A, B, and C-are under consideration. The cash flows associated with each are shown in the following table. The firm's cost of capital is 15 percent.
|
Initial Cash Outflow (CFo) Year (t)
|
A
$95,000
|
B
$50,000
Cash Inflows (CFi)
|
C
$150,000
|
|
1
|
$20,000
|
$10,000
|
$ 58,000
|
|
2
|
20,000
|
12,000
|
35,000
|
|
3
|
20,000
|
13,000
|
23,000
|
|
4
|
20,000
|
15,000
|
23,000
|
|
5
|
20,000
|
17,000
|
23,000
|
|
6
|
20,000
|
21,000
|
35,000
|
|
7
|
20,000
|
-
|
46,000
|
|
8
|
20,000
|
-
|
58,000
|
a. Calculate the NPV of each alternative tool.
b. Using NPV, evaluate the acceptability of each tool.
c. Rank the tools from best to worst, using NPV.