BAK Corp. is considering purchasing one of two new diagnostic machines. Either m
ID: 2498919 • 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.
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?
Explanation / Answer
Actual result may vary with the given result to you due to difference in discounting factor digits used, Here 4 digit factor used for accuracy. BAK Corp Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Machine A Initial cost (78,200) Annual Cash Inflows 19,800 19,800 19,800 19,800 19,800 19,800 19,800 19,800 Annual Cash Outflows (5,130) (5,130) (5,130) (5,130) (5,130) (5,130) (5,130) (5,130) Net Annual Cash Inflow 14,670 14,670 14,670 14,670 14,670 14,670 14,670 14,670 Discount factor @9% 1 0.9174 0.8417 0.7722 0.7084 0.6499 0.5963 0.5470 0.5019 PV Of Net Cash Inflows 13,459 12,347 11,328 10,393 9,534 8,747 8,025 7,362 Total PV of Net cash inflows 81,196 NPV 2,996 PI =PV of cash Inflows/Initial cost= 1.04 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Machine B Initial cost (182,000) Annual Cash Inflows 39,600 39,600 39,600 39,600 39,600 39,600 39,600 39,600 Annual Cash Outflows (10,180) (10,180) (10,180) (10,180) (10,180) (10,180) (10,180) (10,180) Net Annual Cash Inflow 29,420 29,420 29,420 29,420 29,420 29,420 29,420 29,420 Discount factor @9% 1 0.9174 0.8417 0.7722 0.7084 0.6499 0.5963 0.5470 0.5019 PV Of Net Cash Inflows 26,991 24,762 22,718 20,842 19,121 17,542 16,094 14,765 Total PV of Net cash inflows 162,834 NPV (19,166) PI =PV of cash Inflows/Initial cost= 0.89 Machine A Machine B NPV 2,996 (19,166) PI 1.04 0.89 As NPV is positive and having greater PI, Machine A should be purchased
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