Exercise 177 KSU Corp. is considering purchasing one of two new diagnostic machi
ID: 2525920 • Letter: E
Question
Exercise 177 KSU 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 Machine A $106,000 8 years Machine B $175,000 8 years Original cost Estimated life Salvage value Estlmated annual cash Inflows Estimated annual cash outflows -0 $30,000 $45,000 $10,000 $15,000 Calculate the net present value and profitability index o each machine. Assume a 9% discount rate. For calculation purposes, use 5 decimal places as displayed in the factor table provided and net present value to the nearest whole dollar, e.g. 5,275 and profitability index to 2 decimal places, e.g. 15.25.) Machine A Machine B Net present value , Profitability index Which machine should be purchased? Click if you would like to Show Work for this question: Qpan Show Work SHOW SOLUTION LINK TO TEXT LINK TO TEXT 12:12 AM 1/19/2018 searchExplanation / Answer
Answer:
Machine-A
Machine-B
NPV
$4,696
($8,956)
Profitabelity .Index
$1.04
$0.95
Machine -A Should be purchase
Because it gives positive NPV and Higher profitability index
Working notes for the above answer is as under
Machine-A
Initial Investment
$106,000
Chart Values are Based on:
i =
9%
Year
Cash Inflow
x
PV Factor
=
Present Value
1
20000
0.9174
=
18348
2
20000
0.8417
=
16834
3
20000
0.7722
=
15444
4
20000
0.7084
=
14168
5
20000
0.6499
12998
6
20000
0.5963
11926
7
20000
0.547
10940
8
20000
0.5019
=
10038
Total
110696
Less:Initial Investment
($106,000)
NPV
$4,696
Cash flow for machien A
=30,000-10,000
=20,000
Machine -B
Initial Investment
$175,000
Year
Cash Inflow
x
PV Factor
=
Present Value
1
30000
0.9174
=
27522
2
30000
0.8417
=
25251
3
30000
0.7722
=
23166
4
30000
0.7084
=
21252
5
30000
0.6499
19497
6
30000
0.5963
17889
7
30000
0.547
16410
8
30000
0.5019
=
15057
Total
166044
Cash flow for machien B
=45,000-15,000
=30,000
__________________
2
Numerator
/
Denominator
=
Profitabelity
Index
Machine-A
110696
/
$106,000
=
$1.04
Machine-B
166044
/
$175,000
=
$0.95
Machine-A
Machine-B
NPV
$4,696
($8,956)
Profitabelity .Index
$1.04
$0.95
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