Question

--/20 Question 2 View Policies Current Attempt in Progress 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 8 years $190,000 8 years Estimated life Salvage value Estimated annual cash inflows $40,000 $19,600 $4,990 Estimated annual cash outflows $9.970 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 O 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

CACULATION OF PRESENT VALUE OF THE PROJECT A & PROFITABILITY INDEX
Period	Particulars	Cash Flow	PVF of $ 1 @ 9 %	Present Value
0	Outflow	$               -75,500	1.00000	$             -75,500.00
1	Inflow - Outflow	$                14,610	0.91743	$               13,403.67
2	Inflow - Outflow	$                14,610	0.84168	$               12,296.94
3	Inflow - Outflow	$                14,610	0.77218	$               11,281.60
4	Inflow - Outflow	$                14,610	0.70843	$               10,350.09
5	Inflow - Outflow	$                14,610	0.64993	$                 9,495.50
6	Inflow - Outflow	$                14,610	0.59627	$                 8,711.47
7	Inflow - Outflow	$                14,610	0.54703	$                 7,992.17
8	Inflow - Outflow	$                14,610	0.50187	$                 7,332.27
	Total			$                       5,364
CACULATION OF PROFITABILITY INDEX OF INVESTMENT
Profitability Index = 1 + Net present Value / Initial investment
Profitability Index =          1 +		$                   5,364	"/" By	$               75,500.00
Profitability Index =          1 +		0.07
Profitability Index =		1.07
CACULATION OF PRESENT VALUE OF THE PROJECT B & PROFITABILITY INDEX
Period	Particulars	Cash Flow	PVF of $ 1 @ 9 %	Present Value
0	Outflow	$           -1,90,000	1.00000	$         -1,90,000.00
1	Inflow - Outflow	$                30,030	0.91743	$               27,550.46
2	Inflow - Outflow	$                30,030	0.84168	$               25,275.65
3	Inflow - Outflow	$                30,030	0.77218	$               23,188.67
4	Inflow - Outflow	$                30,030	0.70843	$               21,274.01
5	Inflow - Outflow	$                30,030	0.64993	$               19,517.44
6	Inflow - Outflow	$                30,030	0.59627	$               17,905.91
7	Inflow - Outflow	$                30,030	0.54703	$               16,427.44
8	Inflow - Outflow	$                30,030	0.50187	$               15,071.04
	Total			$                   -23,789
CACULATION OF PROFITABILITY INDEX OF INVESTMENT
Profitability Index = 1 + Net present Value / Initial investment
Profitability Index =          1 +		$               -23,789	"/" By	$           1,90,000.00
Profitability Index =          1 +		-0.13
Profitability Index =		0.87
	ANSWER 1 =
		Machine A	Machine B
	Net Present Value	$                   5,364	$                   -23,789
	Profitability index	1.07	0.87
	ANSWER 2 =
	Machine A should be purchased because Net present value and Profitability index
	is greater than Machine B
	Answer = Machine A