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.)

Which machine should be purchased?

Machine A Machine B Original cost $76,700 $183,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $20,200 $40,500 Estimated annual cash outflows $5,040 $9,870

Explanation / Answer

Net Annual Cash Flow

Machine A= 20,200-5,040=$15,160

Machine B= 40,500-9,870=$30,630

Machine A

Year

CashFlow

PV Factor@ 9%

PV

0

             (76,700)

1.0000

                        (76,700)

1

               15,160

0.9174

                          13,908

2

               15,160

0.8417

                          12,760

3

               15,160

0.7722

                          11,706

4

               15,160

0.7084

                          10,740

5

               15,160

0.6499

                             9,853

6

               15,160

0.5963

                             9,039

7

               15,160

0.5470

                             8,293

8

               15,160

0.5019

                             7,608

NPV

                             7,208

Profitability index =NPV + Initial Investment/ Initial Investment

                                = 7,208 +76,700/76,700

                                =83,908/76,700

                                 =1.09

Machine B

Year

CashFlow

PV Factor@ 9%

PV

0

          (183,000)

1.0000

                      (183,000)

1

               30,630

0.9174

                          28,101

2

               30,630

0.8417

                          25,781

3

               30,630

0.7722

                          23,652

4

               30,630

0.7084

                          21,699

5

               30,630

0.6499

                          19,907

6

               30,630

0.5963

                          18,264

7

               30,630

0.5470

                          16,756

8

               30,630

0.5019

                          15,372

NPV

                        (13,468)

Profitability index =NPV + Initial Investment/ Initial Investment

                                = -13,468 +183,000/183,000

                                =169,532/183,000

                                 =0.93

a)                           

Machine A

Machine B

Net Present Value

                                 7,208

          (13,468)

Profitability Index

1.09

0.93

b)

Machine A should be purchased As NPV is positive and Profitability Index is greater than 1

Machine A

Year

CashFlow

PV Factor@ 9%

PV

0

             (76,700)

1.0000

                        (76,700)

1

               15,160

0.9174

                          13,908

2

               15,160

0.8417

                          12,760

3

               15,160

0.7722

                          11,706

4

               15,160

0.7084

                          10,740

5

               15,160

0.6499

                             9,853

6

               15,160

0.5963

                             9,039

7

               15,160

0.5470

                             8,293

8

               15,160

0.5019

                             7,608

NPV

                             7,208

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