A firm is considering replacing a computer system with a new one. Purchase price of new computer is Rs.80, 000.00 and its installation costs are Rs. 1000.00. The cash flow from the sale of old computer is expected to be Rs. 20’000.00. The CFAT, after the installation of new computer is expected to be Rs. 15’000.00 each year for five years. The salvage value at the end of 5 years has been calculated as Rs. 20’000.00. Should the proposal of replacing the computer be accepted on the basis of NPV as a decision criteria discounted @ 12%. What is profitability index (PI) is used as decision criteria?

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Originally Posted by Akbar Shahbaz

A firm is considering replacing a computer system with a new one. Purchase price of new computer is Rs.80, 000.00 and its installation costs are Rs. 1000.00. The cash flow from the sale of old computer is expected to be Rs. 20’000.00. The CFAT, after the installation of new computer is expected to be Rs. 15’000.00 each year for five years. The salvage value at the end of 5 years has been calculated as Rs. 20’000.00. Should the proposal of replacing the computer be accepted on the basis of NPV as a decision criteria discounted @ 12%. What is profitability index (PI) is used as decision criteria?

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To calculate NPV it is best to use the function in your spreadsheet