Question

BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn’t equipped to do. Estimates regarding each machine are provided below.

Machine A Machine B

Original cost $75,700 $189,000

Estimated life 8 years 8 years Salvage value 0 0

Estimated annual cash inflows $19,800 $39,800

Estimated annual cash outflows $4,990 $10,100

Calculate the net present value and profitability index of each machine.

Assume a 9% discount rate. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answer for present value to 0 decimal places, e.g. 125 and profitability index to 2 decimal places, e.g. 10.50. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Machines A Machine B

Net present value

Profitability index

Answer 1

Machine A
					Cash	*	9% discount	=	Present
					Flows		factor		Value
present value of net annual cash flows					14810	*	5.53482	=	81971
present value of salvage value					0	*	0.50187	=	0
									81971
capital investment									75,700
Net present value									6271
profitability index		=	81,971/75700
			1.08
Machine B
					Cash	*	9% discount	=	Present
					Flows		factor		Value
present value of net annual cash flows					29700	*	5.53482	=	164384
present value of salvage value					0	*	0.50187	=	0
									164384
capital investment									189,000
Net present value									-24616
profitability index		=	164384/189000
			0.87
2)	Machine A should be purchased