Question

Angler Corp. is considering purchasing one of two new processing machines. Either machine would make it possible for the company to produce its products more efficiently than it is currently equipped to do. Estimates regarding each machine are provided below: Machine A Machine B Original cost $113,600 $270,000 Estimated life 10 years 10 years Salvage value -0- -0- Estimated annual cash inflows $30,200 $59,700 Estimated annual cash outflows $7,500 $14,900 (a) Calculate the net present value and profitability index of each machine. Assume an 8% discount rate. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 2 decimal places e.g. 589.71. Enter negative amounts using either a negative sign preceding the number e.g. -45.35 or parentheses e.g. (45.35).) Machine A Machine B Net present value $ $ Profitability index Which machine should be purchased? Angler Corp. should purchase .

Answer 1

Calculation Of NPV and Profitability Index
		Machine A	Machine B
a	Annual Cash Inflow	$      30,200.00	$                  59,700.00
b	Annual Cash Outflow	$        7,500.00	$                  14,900.00
c	Annul Net Cash Flow (a-b)	$      22,700.00	$                  44,800.00
d	PVAF (10years ,8%)	6.71008	6.71008
e	PV Of Annual Cash flow (c*d))	$        1,52,319	$                    3,00,612
f	Initial Investment	$ 1,13,600.00	270000.00
g	Net Present Value (e-f)	$      38,718.82	$                  30,611.58
h	profitability index (e/f)	1.34	1.11
Many times due to rounding off of factors final answers gets wrong hence I have provided
the following alternative answer. Use the following answers if the above answers show wrong.
		Machine A	Machine B
a	Annual Cash Inflow	$      30,200.00	$                  59,700.00
b	Annual Cash Outflow	$        7,500.00	$                  14,900.00
c	Annul Net Cash Flow (a-b)	$      22,700.00	$                  44,800.00
d	PVAF (9%, 8 years)	6.71008	6.71008
e	PV Of Annual Cash flow (c*d))	$        1,52,319	$                    3,00,612
f	Initial Investment	$ 1,13,600.00	270000.00
g	Net Present Value (e-f)	$      38,718.85	$                  30,611.65
h	profitability index (e/f)	1.34	1.11