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		$76,000		$183,000
Estimated life		8 years		8 years
Salvage value		0		0
Estimated annual cash inflows		$20,000		$39,600
Estimated annual cash outflows		$5,140		$10,090

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
Profitability index

Which machine should be purchased?

select a machine                                                          Machine AMachine B should be purchased.

Answer 1

Answer:
	Machine A	Machine B
Estimated Annual cash inflows	$ 20,000	$ 39,600
Less: Estimated Annual cash outflows	($ 5,140 )	($ 10,090)
Annual Cash Flows	$ 14,860	$ 29,510
Machine A
	PVAF ( 9% , 8 Years ) (A)	Annual Cash Flows Machine A (1 )	Annual Cash Flows Machine (2)	PV of Cash Inflows Machine A ( A x 1)	PV of Cash Inflows Machine B ( A x 2)
Present value of Net annual cash flows	5.53482	$ 14,860	$ 29,510	$ 82,247.43	$ 163,332.54
Less: Initial investment				($ 76,000)	($ 183,000)
Net present value				$ 6,247	($ 19,667)
Profitability index - Machine A        = Present value of Net annual cash flows / Initial investment       =    $ 82,247.43 / $ 76,000	1.08
Profitability index - Machine B        = Present value of Net annual cash flows / Initial investment       =    $ 163,332.54 / $ 183,000	0.89
	Machine A	Machine B
Net present value	$ 6,247	($ 19,667)
Profitability index	1.08	0.89
2)
Machine A Should be Purchased