TLC Corp. is considering purchasing one of two new diagnostic machines. Either m

Question

TLC 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 $78,000 $190,000
Estimated life 8 years 8 years
Salvage value 0 0
Estimated annual cash inflows $20,000 $40,000
Estimated annual cash outflows $5,000 $9,000


Calculate the net present value and profitability index of each machine. Assume a 9% discount rate. (Round net present value to 0 decimal places, e.g. 125 and profitability index to 2 decimal places, e.g. 10.50. Round computations for 9% Discount Factor to 5 decimal places. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg 45).)

Machine ANet present value $
Profitability index


Machine BNet present value $
Profitability index


Which machine should be purchased? Machine AMachine B

Explanation / Answer

Discounted

Cash Inflows

Discount Factor 9%

Cash Flow

Discounted

Cash Inflows

Discount Factor 9%

Cash Flow

Machine A Net Present Value = $5,022 Profitability Index = 1.06 Machine B Net Present Value = $18,421 Profitability Index = 0.90

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