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 $77,700 $181,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $20,500 $40,400 Estimated annual cash outflows $5,070 $10,000 Click here to view PV 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? should be purchased.

Answer 1

Solution

	Machine A	Machine B
Net present value	$           7,702	$         (12,741)
Profitability index	1.10	0.93

.

Which machine should be purchased-

Machine A

Working

Machine A
Year	Cash inflow	Cash outflow	Net cash inflow	PVA factor	Present value of all cash inflow
1-8..	$   20,500.00	$       5,070.00	$   15,430.00	5.53482	$        85,402.27
Less: Initial Investment					$      (77,700.00)
Net Present Value					$           7,702.27

.

Machine B
Year	Cash inflow	Cash outflow	Net cash inflow	PVA factor	Present value of all cash inflow
1-8..	$   40,400.00	$     10,000.00	$   30,400.00	5.53482	$      168,258.53
Less: Initial Investment					$    (181,000.00)
Net Present Value					$      (12,741.47)

Profitability index = Present value of cash flows/ Initial investment