Exercise 26-4 BAK Corp. is considering purchasing one of two new diagnostic mach

Question

Exercise 26-4

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.)

Which machine should be purchased?

Machine A Machine B Original cost $77,700 $181,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $20,500 $40,400 Estimated annual cash outflows $5,070 $10,000

Explanation / Answer

MAchine A should be chosen as it is having a positive NPV

Particulars Year PVF @ 9% Cash Flow Machine A Cash Flow Machine B PV Machine A PV Machine B Initial Cost 0 1 -77700 -181000        -77,700.00    -1,81,000.00 Net Estimated annual cash inflows 1 to 8            5.53 15430 30400          85,401.96      1,68,257.92 Net Present Value            7,701.96        -12,742.08 Profitability Index 1.099 0.9296

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.