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 $76,600 $187,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $20,400 $40,400 Estimated annual cash outflows $5,190 $10,130

Explanation / Answer

Req 1 NPV at 9% machine-A Annual Cash inflows 20400 Less: Outflows 5190 Net annual cash inflows 15210 Annuity factor at 9% for 8 yrs 5.5348 Present value of Inflows 84184.31 Less: Initial investment 76600 NPV at 9% 7584.308 Machine-B Annual Cash inflows 40400 Less: Outflows 10130 Net annual cash inflows 30270 Annuity factor at 9% for 8 yrs 5.5348 Present value of Inflows 167538.4 Less: Initial investment 187000 NPV at 9% -19461.6 Req 2: profitability index: Present value of inflows/ Initial investment Mmachine-A :    $ 84184 /76600 = 1.099 machine-B: $ 167538 /187000 = 0.896 Machine-A shall be selected.

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