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?
A) Press A
B) Press B
C) Both Presses A and B
D) Neither Press A nor B

Question

Quizplus · Accepted Answer

To determine the better option, we calculate the Net Present Value (NPV) of both presses over an 8-year period to make a fair comparison. For Press A, this includes the initial investment and the cost of replacement after 4 years, both discounted at the 12% cost of capital, along with the cash inflows. For Press B, it's a straightforward calculation of the initial cost and the cash inflows over its 8-year life. The option with the higher NPV is considered more financially viable.

Rollerblade, a Maker of Skating Gear, Is Evaluating Two Alternative