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.

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 $75,500 $190,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $19,600 $40,000 Estimated annual cash outflows $4,990 $9,970 Click here to view the factor table. 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.) Machine A Machine B Net present value enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places Profitability index enter the profitability index rounded to 2 decimal places enter the profitability index rounded to 2 decimal places Which machine should be purchased? select a machine                                                          Machine BMachine A should be purchased.

Click here to view the factor table.

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.)

		Machine A		Machine B
Net present value		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places
Profitability index		enter the profitability index rounded to 2 decimal places		enter the profitability index rounded to 2 decimal places

Which machine should be purchased?

select a machine                                                          Machine BMachine A should be purchased.

Answer 1

	Machine A	Machine B
Net Present value	5364	-23789
Profitability index	1.07	0.87
Machine A should be purchased
Workings:
Machine A:
Estimated annual cash inflows	19600
Estimated annual cash outflows	4990
Net annual cash flows	14610
Net annual cash flows	14610
X PV factor	5.53482	=(1-(1.09)^-8)/0.09
Present value of Net annual cash flows	80864
Less: Investment cost	75500
Net Present value	5364
Present value of Net annual cash flows	80864
Divided by Investment cost	75500
Profitability index	1.07
Machine B:
Estimated annual cash inflows	40000
Estimated annual cash outflows	9970
Net annual cash flows	30030
Net annual cash flows	30030
X PV factor	5.53482
Present value of Net annual cash flows	166211
Less: Investment cost	190000
Net Present value	-23789
Present value of Net annual cash flows	166211
Divided by Investment cost	190000
Profitability index	0.87