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 $78,300 $185,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $19,700 $39,900 Estimated annual cash outflows $5,040 $9,850

Calculate the net present value and profitability index of each machine. Assume a 9% discount rate

Answer 1

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Bak Corp	Figures in US $		Note
Particulars	Machine A	Machine B
Cost of equipment	78,300.00	185,000.00	A
Estimated Annual cash inflows	19,700.00	39,900.00	B
Estimated annual cash outflows	5,040.00	9,850.00	C
Net cash inflow	14,660.00	30,050.00	D=B-C
Annuity factor of 9% for 8 years	5.535	5.535	E
Present Value of Net Operating cash inflow	81,140.45	166,321.31	F=D*E
Net Present Value of cash inflow	2,840.45	(18,678.69)	G=F-A
Project Profitability Index	1.04	0.90	H=G/A