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		$77,300		$180,000
Estimated life		8 years		8 years
Salvage value		0		0
Estimated annual cash inflows		$20,200		$40,000
Estimated annual cash outflows		$4,970		$9,860

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		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places
Profitability index		enter the Profitability index rounded to 2 decimal places		enter the Profitability index rounded to 2 decimal places

Which machine should be purchased?

select a machine that should be purchased                                                          Machine BMachine A should be purchased.

Answer 1

Answer
	Machine A	Machine B
Net present value	$           6,995	$      -13,181
Profitability index	1.1	0.93
Machine A should be purchased
Workings:
Machine A:
Estimated annual cash inflows	$         20,200
Estimated annual cash outflows	$           4,970
Net annual cash flows	$         15,230
Net annual cash flows	$         15,230
X PV factor	5.53482
Present value of Net annual cash flows	$         84,295
Less: Investment cost	$         77,300
Net Present value	$           6,995
Present value of Net annual cash flows	$         84,295
Divided by Investment cost	$         77,300
Profitability index	1.1
			Machine B:
Estimated annual cash inflows	$         40,000
Estimated annual cash outflows	$           9,860
Net annual cash flows	$         30,140
Net annual cash flows	$         30,140
X PV factor	5.53482
Present value of Net annual cash flows	$      1,66,819
Less: Investment cost	$      1,80,000
Net Present value	$       -13,181
Present value of Net annual cash flows	$      1,66,819
Divided by Investment cost	$      1,80,000
Profitability index	0.93
Machine A should be purchased
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