Question

Exercise 24-4 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 Machine A Original cost $78,000 $184,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $19,800 $40,300 $10,160 Estimated annual cash outflows $4,820 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 Profitability index Which machine should be purchased? |should be purchased

Answer 1

	Machine A	Machine B
Initial Investment (A)	78000	184000
Estimated Life (Years)	8	8
Annual Cash inflows	19800	40300
Annual Cash Outflows	4820	10160
Net Annual Cash Inflow	14980	30140
PVIFA @ 9% for 8 Years	5.53482	5.53482
PV of Net Cash Inflows (B)	82,912	1,66,819
NPV = (B) - (A)	4,912	(17,181)
Profitability Index (B) / (A)	1.06	0.91

Since NPV of Machine A is positive and its PI is higher as compared to Machine B, machine A should be purchased.