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

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 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 Original cost $78,000 $184,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $19,800 $40,300 Estimated annual cash outflows $4,820 $10,160

Explanation / Answer

Answer:

1)

Machine A

Machine B

Estimated annual cash inflows

19800

40300

Less;

Estimated annual cash Outlaws

4820

10160

Net cash flow

14980

30140

Now We will find NPV as under

Machine- A

Initial Investment

($78,000)

Chart Values are Based on:

i =

9%

Year

Cash Inflow

x

PV Factor

=

Present Value

1

14980

0.9174

=

13743.1193

2

14980

0.8417

=

12608.3663

3

14980

0.7722

=

11567.3085

4

14980

0.7084

=

10612.2097

5

14980

0.6499

9735.97217

6

14980

0.5963

8932.08456

7

14980

0.5470

8194.57299

8

14980

0.5019

=

7517.95687

Total

82911.5903

Less: Initial Investment

$78,000

NPV

$4,911.59

Machine- B

Initial Investment

(184,000)

Year

Cash Inflow

x

PV Factor

=

Present Value

1

30140

0.9174

=

27651.3761

2

30140

0.8417

=

25368.235

3

30140

0.7722

=

23273.6101

4

30140

0.7084

=

21351.9359

5

30140

0.6499

19588.932

6

30140

0.5963

17971.4972

7

30140

0.5470

16487.6121

8

30140

0.5019

=

15126.2497

Total

166819.448

Less:Initial Investment

($184,000)

NPV

($17,180.6)

Numerator

/

Denominator

=

Profitability
Index

Machine-A

82911.59034

/

$78,000

=

$1.06

Machine-B

166819.4481

/

$184,000

=

$0.91

__________________________________________________

Machine-A

Machine-B

Net present value

4911.6

-17180.6

Profitability Index

1.06

0.91

____________________________________________________________

Machine -A should be purchased,

Machine A

Machine B

Estimated annual cash inflows

19800

40300

Less;

Estimated annual cash Outlaws

4820

10160

Net cash flow

14980

30140

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