BAK Corp. is considering purchasing one of two new diagnostic machines. Either m
ID: 2424811 • Letter: B
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.
Click here to view the factor table.
(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
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.)
Which machine should be purchased?
Explanation / Answer
Year Cashflows (A) PVF@9% Present value 0 $ (78,420) 1.000 $ (78,420) 1 $ 15,420 0.917 $ 14,147 2 $ 15,420 0.842 $ 12,979 3 $ 15,420 0.772 $ 11,907 4 $ 15,420 0.708 $ 10,924 5 $ 15,420 0.650 $ 10,022 6 $ 15,420 0.596 $ 9,194 7 $ 15,420 0.547 $ 8,435 8 $ 15,420 0.502 $ 7,739 Net present value $ 6,927 Profitability index (PI) 1.09 1+6927/78420 Year Cashflows (B) PVF@9% Present value 0 $ (180,700) 1.000 $ (180,700) 1 $ 30,050 0.917 $ 27,569 2 $ 30,050 0.842 $ 25,292 3 $ 30,050 0.772 $ 23,204 4 $ 30,050 0.708 $ 21,288 5 $ 30,050 0.650 $ 19,530 6 $ 30,050 0.596 $ 17,918 7 $ 30,050 0.547 $ 16,438 8 $ 30,050 0.502 $ 15,081 Net present value $ (14,379) Profitability index (PI) 0.92 1-14379/180700 Machine A should be purchased.
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