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 Py 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 O 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 7362 166384 Profitability index Which machine should be purchased? Machine A should be purchased.

Answer 1

Machine B:

NPV:

1) Present value of Future Cash Flow

= Net Cash Inflow * Pv factor

= ( $39500 - $9800) * 5.5348

= $ 29,700 * 5.5348

= $ 164,384.

Note:

( The Present value @9% for 8 years is 5.5348)

2) NPV:

= Pv of future cash flow- Initial Investment

= $ 164,384 - 179,000

= ($ 14,616)