Question

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Oriole 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 $75,700 $182,000 Estimated life 8 years 8 years Salvage value Estimated annual cash inflows $20,300 $4,870 $39,700 $10,050 Estimated annual cash outflows 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 es (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 Profitability index

Answer 1

Solution:

Computation of NPV
			Machine A		Machine B
Particulars	Period	PV Factor	Amount	Present Value	Amount	Present Value
Cash outflows:
Initial investment	0	1	$75,700	$75,700	$182,000	$182,000
Present Value of Cash outflows (A)				$75,700		$182,000
Cash Inflows
Annual cash inflows	1-8	5.535	$15,430	$85,402	$29,650	$164,107
Present Value of Cash Inflows (B)				$85,402		$164,107
Net Present Value (NPV) (B-A)				$9,702		-$17,893

Computation of Profitability Index
Particulars	Machine A	Machine B
NPV	$9,702	-$17,893
Initial investment	$75,700	$182,000
Profitability Index (PV of cash inflows / Initital investment)	0.13	-0.10