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 Original cost $74,500 Estimated life 8 years Salvage value Estimated annual cash inflows $20,300 Estimated annual cash outflows 55,100 Machine B $180,000 8 years $40,200 $9,810 Click here to view Pitable Calculate the net present value and profitability index of each machine. Assume a 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 decimal places... 125 and profitability index to 2 decimal places 0.0 10.50. For calculation purposes, use 5 decimal places as displayed in the factor table provided) Machine A Machine Net present value Profitability Index which machine should be purchased? Machine sold be purchased

Answer 1

(1) Machine A

(a)

Annual net cash flow = $20300 - $5100 = $15200

Net present value = present value of annual net cash flow - initial investment

= ($15200 x 5.53482) - $74500

= $84129.264 - $74500

= $9629

where,

PVAF(9%, 8) = 5.53482

(b)

Profitability index = present value of annual net cash flow/initial investment

= $84129.264/$74500

= 1.13

——————————————————————

(2) Machine B

(a)

Annual net cash flow = $40200 - $9810 = $30390

Net present value = present value of annual net cash flow - initial investment

= ($30390 x 5.53482) - $183000

= $168203.1798 - $183000

= -$14797

where,

PVAF(9%, 8) = 5.53482

(b)

Profitability index = present value of annual net cash flow/initial investment

= $168203.1798 - $183000

= 0.92

therefore,

	Machine A	Machine B
Net present value	$9629	-$14797
Profitability index	1.13	0.92

Conclusion: Machine A should be purchased.