BAK Corp. is considering purchasing one of two new diagnostic machines. Either m
ID: 2457491 • 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.
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 ided below Original cost Estimated life Salvage value Estimated annual cash inflows Estimated annual cash outflows Machine A $77,630 8 years 0 $19,710 $4,860 Machine B $186,900 8 years 0 $39,610 $9,980 (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.) Machine A Machine B Net present value Profitability index e should be purchased? should be purchasedExplanation / Answer
Answer:
Information about Depreciation is missing in the question.
If Depreciation Amount is not considred, the answer and calculation will be as follows:
Net Present Value
Machine A = $4,562 (Positive)
Machine B = ($22,903) Negative
Profitability Index = PV of Cash Flows / PV of Cash Outflows
Machine A = $82,192 / $77,630 = 1.05876
Machine B = $163,997 / $186,900 = 0.87745
Which Machine should be Purchased ?
It is suggested to Purchase Machine A bacause Machine A has higher NPV and higher Profitability index from machine B.
If Depreciation amount is considered, the answer and calculation will be as follows
It is assumed that Depreciation is charged on the basis of Straight Line Method over the useful life of Machines.
Net Present Value
Machine A = $58,270.59
Machine B = $106,403.95
Profitability Index = PV of Cash Flows / PV of Cash Outflows
Machine A = $135,900.59 / $77,630 = 1.75
Machine B = $293,303.95 / $186,900 = 1.569
Which Machine should be purchased ?
According to NPV, Machine B should be purchased since the Net Present Value under Machine B is higher than Machine A
As per Profitability Index, Machine A's PI is higher than Machine B...so Machine A is more profitable and provide higher rate of return than Machine B due to less initial investment..
However, for decision making NPV method is good, so Machine B should be purchased due to higher NPV..
Particulars Amount in US$ Machine A Machine B A. Original Cost $77,630 $186,900 B. Estimated Life 8 Years 8 Years C. Salvage Value 0 0 E. Estimated Annual Cash Inflows $19,710 $39,610 F. Estimated Annual Cash Outflows $4,860 $9,980 G. Estimated Annual Net Cash Flows (E - F) $14,850 $29,630 H. PVIFA (9%, 8) 5.53482 5.53482 I. Present Value of Net Cash Flows (G x H) $82,192 $163,997 J. Present Value of Cash Outflows (Cost of Machine) $77,630 $186,900 K. Net Present Value (PV of Cash Flows - PV of Cash Outflows) (I - J) $4,562 ($22,903)Related Questions
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