BAK Corp. is considering purchasing one of two new diagnostic machines. Either m
ID: 2576159 • 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.)
Explanation / Answer
Solution:
Machine A
Machine B
NPV
7207.86
-13,469.08
PI
1.09
0.93
2) Machine A
Working:
Original cost 76,700; $183,000
Present value of net annual cash flows = 15160 * 5.5348 = 83907.86
Present value of salvage value = 0
Capital investment = 76,700
Net present value = 7207.86 ( = 83907.86 - 76,700)
Profitability index = 83907.86 / 76,700 = 1.09
Present value of net annual cash flows = 30630 * 5.5348 = 169530.92
Present value of salvage value = 0
Capital investment = 183,000
Net present value = -13,469.08 (=169530.92 - 183,000)
Profitability index = 169530.92 / 183,000 = 0.93
Because Machine B has a negative net present value, and also a lower profitability index. Thus Machine B has to be rejected and Machine A should be purchased.
Machine A
Machine B
NPV
7207.86
-13,469.08
PI
1.09
0.93
2) Machine A
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