BAK Corp. is considering purchasing one of two new diagnostic machines. Either m
ID: 2498315 • 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.
(Refer the below 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.)
Machine A Machine B Original cost $78,060 $187,700 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $20,020 $40,440 Estimated annual cash outflows $4,820 $10,200Explanation / Answer
Machine A:- Calculation of NPV:- Initial Investment $ 78,060.00 Calculation of Cash IN flow EVERY YEAR : Cash inflow $ 20,020.00 Cash outflow $ 4,820.00 Net Cash Flow $ 15,200.00 Calculation of NPV:- Year (Cash outflow)/Inflow PVAF @9% Present value 0 $ (78,060.00) 1 $ (78,060.00) 1 $ 15,200.00 0.9174 $ 13,944.48 2 $ 15,200.00 0.8417 $ 12,793.84 3 $ 15,200.00 0.7722 $ 11,737.44 4 $ 15,200.00 0.7084 $ 10,767.68 5 $ 15,200.00 0.6499 $ 9,878.48 6 $ 15,200.00 0.5963 $ 9,063.76 7 $ 15,200.00 0.547 $ 8,314.40 8 $ 15,200.00 0.5019 $ 7,628.88 NPV $ 6,068.96 Total Cash Inflow $ 84,128.96 ** Cash flows has to be discounted at Required rate of return ** As NPV results to positive figure, Machine A can be accepted. Profitability Index Cash Inflows/Cash Outflows Profitability Index 84128.96/78060 Profitability Index 1.077747 (>1, Machine A Can Purchase) Machine A:- Calculation of NPV:- Initial Investment $ 1,87,700.00 Calculation of Cash IN flow EVERY YEAR : Cash inflow $ 40,440.00 Less: Cash outflow $ 10,200.00 Net Cash Flow $ 30,240.00 Calculation of NPV:- Year (Cash outflow)/Inflow PVAF @9% Present value 0 $ (1,87,700.00) 1 $ (1,87,700.00) 1 $ 30,240.00 0.9174 $ 27,742.18 2 $ 30,240.00 0.8417 $ 25,453.01 3 $ 30,240.00 0.7722 $ 23,351.33 4 $ 30,240.00 0.7084 $ 21,422.02 5 $ 30,240.00 0.6499 $ 19,652.98 6 $ 30,240.00 0.5963 $ 18,032.11 7 $ 30,240.00 0.547 $ 16,541.28 8 $ 30,240.00 0.5019 $ 15,177.46 NPV $ (20,327.65) Total Cash Inflow $ 1,67,372.35 ** Cash flows has to be discounted at Required rate of return ** As NPV results to Negative figure, Machine B can't be accepted. Profitability Index Cash Inflows/Cash Outflows Profitability Index 167372.35/187700 Profitability Index 0.891701 (Less than 1, Machine B should not accept)
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