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.

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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.)

Machine A Machine B Original cost $76,900 $186,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $19,600 $39,800 Estimated annual cash outflows $5,150 $10,080

Explanation / Answer

Machine A 9% presnet value Cash flow discount factor present value of net annual cash flows 14,450 5.53482 79978 present value of salvage value 0 0.50187 0 79978 Capital investment -76,900 net present value 3078 profitability index 79,978/76900= 11.59 Machine B 9% presnet value Cash flow discount factor present value of net annual cash flows 29,720 5.53482 164495 present value of salvage value 0 0.50187 0 164495 Capital investment -186,000 net present value -21505 profitability index 164,495/186000 0.88 Machine A Machine B Net present value 3078 -21,505 profitability index 11.59 0.88

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