Calculate the net present value and profitability index of each machine. Assume

Question

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 $77,300 8 years 0 $20,200 Machine B $180,000 8 years 0 $40,000 $9,860 Original cost irikxl life: Salvage value Estimated annual cash inflows Estimated annual cash outflows $4,970

Explanation / Answer

MAchine A

a) Project A Project B Annual cash flows 15230 30140 Pv value annuity factory n=8 i = 9% 5.53482 5.53482 Present value of cashflows 84295 166819 b) Present value of cashflows 84295 166819 Initial investment 77300 180000 Net present value 6995 -13181 c) Profitability index= present value of future cashflows / initial investment Present value of cashflows 84295 166819 Initial investment 77300 180000 Profitability index 1.09 0.93

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