For many capital investments:
 Economic life may not be fixed
 Different times of abandonment
Under this environment, the investment can come to end at any time over the
the economic life of the investment.
Problem #1 Replacement Problem
Cost of Old Machine
Depreciation per year
Cost of New Machine
Savings per year from New Machine
Salvage Value of New Machine
1. PROFITABILITY INDEX
The profitability index (PI) is the value increase per dollar invested.
If an initial investment (I) will generate cash flows in future years, the index is calculated as
PI = The sum of the future cash flows discounted at the cost o
MORE CAPITAL BUDGETING PROBLEMS
Carbo Corporation has a choice between using a 5-year MACRS depreciation or
a straight-line depreciation method.
The depreciable cost of the asset is
It has an economic life of
The straight line depreciation is at a rate
Catapiller Corp. is considering the purchase of new technology tires for some
of their earth moving machinery.
The tires require initial outlay of
The new tech tires will save Catapiller money each year.
Measuring Investment Value
Alternate Mesures of Capital Investment Desirability
Estimating Incremental Cash Flows
Taxes and Incremental Cash Flows
Problem #1 You have asked to an
Using NPV with Unequal Lives
The situation of comparing projects that have different economic lives is more common
than the scenario of equal lives as presented in most finance text books.
A situation could be where United Airlines has a choice b
The board of directors of boulder Corporation are considering 2 alternatives in dealing with
an old deteriorated building.
The existing building can be refurbished at $4,000,000.00
A new building
San Jose Industries is considering a capital investment that requires an initial outlay of
The future years are expected to have some cash flows to be be negative due to
required maintenance contracts on the project. Th