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 B $179,000 8 years Machine A Original cost $74,000 Estimated life 8 years Salvage value Estimated annual cash inflows $19,500 Estimated annual cash outflows $4,800 $39,500 $9,800 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

Answer 1

Solution present value: 1950o be 4800 Calculation of the net Machine a: cash Inflower (ash outflowes Net cash Inflow (amb) present value rate factor at 9% for 8 years present value cash Inflowers (cxd) 14700 5.53 e 81291

f. 74000 g. cash outflow Net present value 1. (e-f) Machine B : a. cash Inflows 39500 Cash out flows 9800 29700 Net cash Inflow 1. (a-b) d 5.53 present value rate factor at 91% for 8 year 179000 present value cash 164241 Inflows (exd) f cash outflow g Net present value - 14759 1. (e-t) calculation of probability Index : Machine A : probability Index = present value of cash 81291 / 74000 Inflows / cash outflows Machine B probability Index = present value of cash Inflows / cash outflows 164241 / 179000 0.91 GILDI