Question

Your answer is partially correct. Try again Todor Corp. is considering purchasing one of two new diagnostic machines. The following estimated data has been determined by management: Initial cost Estimated We Salvage value Estimated annual cash flows Estimated annual cash outflows Machine 1 $40,000 5 years $1,000 $15,000 $3,900 Machine 2 $50,000 5 years $1.400 $19,800 $6,950 as desplayed in the factor tale provided 1.25124 Click here to view PV tahe. Calculate the profitability index assuming a 5% discount rate. (For places 1.251.) Profitability Index 9 ,057 Machine 1 9,034 Machine 2 Based on your answer which project should the company choose? I n 2019 John Wiley Sons, Inc. All Rights Reserved. A Division of John Wiley & Sons, Inc.

The answer is needed in 3 decimals it is not accepted in two decimals

thanks

Answer 1

	Machine A	Machine B
Original Costs(a)	$40,000	$50,000
Net Cash Inflows	$11,100	$12,850
PV factor of annuity at 5% for 5 years	4.32948	4.32948
PV of Net Cash Inflows(b)	$48,057	$55,634
NPV(b-a)	$8,057	$5,634
Profitability Index(b/a)	1.201	1.113
Machine A should be purchased due to its higher NPV and higher PI