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.

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 $75,900 $181,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflow $19,900 $39,800 Estimated annual cash outflows $5,020 $10,050

Explanation / Answer

Machine A: Present value of net annual net cash flows 82358 =(19900-5020)*5.53482 Less: Investment -75900 Net present value 6458 Profitability index = 82358/75900= 1.09 Machine B: Present value of net annual net cash flows 164661 =(39800-10050)*5.53482 Less: Investment -181000 Net present value -16339 Profitability index = 164661/181000= 0.91 Machine A should be purchased

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