Question

Pina 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 $76,700 $183,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $20,200 $40,500 Estimated annual cash outflows $5,040 $9,870 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 e.g.-45 or parentheses e.g.(45). Round answers 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 (In $) Machine B (In $) Net annual cash inflow 15160 30630 ($20200-$5040) ($40500-$9870) PV of annuity factor @9% 5.5348 5.5348 PV of cash inflows 83907.57 169530.92 Intial Investment 76700.00 183000.00 NPV (PV - Intial Invt) 7207.57 -13469.08 Pl Index (PV of CI/Intail Invt) 1.09 0.93 So we would select Machine A as it has positive NPV and Pl is also greater than 1