Academic Integrity: tutoring, explanations, and feedback — we don’t complete graded work or submit on a student’s behalf.

BAK Corp. is considering purchasing one of two new diagnostic machines. Either m

ID: 2585633 • 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. Machine A $76,900 8 years Machine B 186,000 8 years Original cost Estimsted life Salvage value Estimated annual eash inflows Estimated annual cash outflows $19,600 5,150 $39,800 10,080 Calculate the net present value and profitability index o each machine. Assume a 9% discount rate. If the net present value 1s negative, use ether a negatv e sign prece ing the number eg-45 or parentheses eg decimal places, e.g. 125 and profitability index to 2 decinmal places, e.g. 10.50. For calculation purposes, use 5 decimal places as displayed m the factor table provided.) 45 Round answer or present value to 0 Machine A Machine B Net present value Profitability index Which machine should be purchased? should be purchased

Explanation / Answer

Machine A : Original cost = 76,900

Annual Cash Inflows = 19,600 and Estimated Cash Outflow = 5,150

Multiplying both by PVAF(@9% for 8 years) i.e.5.5348

PV of inflows = 19,600*5.5348 = 108,482

PV of outflows = 5,150 * 5.5348 = 28,504

Total outlow = 28,504 + 76,900 = 105,404

NPV = 108,482 - 105,404 = 3,078

Profitability Index (PI) = PV of inflows / PV of outflows = 108,482 /105,404 = 1.029

Machine B: Original Cost = $186,000

Annual Cash Inflows = $39,800 and Estimated Cash Outflows = $10,080

PVAF (@9% for 8 years) = 5.5348

PV of cash inflows = 39800*5.5348 = $220,285

PV of cash outflows = 10,080*5.5348 = $55,790

Total cash Outflows = 55,790 + 186,000 = 241,790

NPV = 220,285 - 241,790 = (21,505)

PI = 220,285 / 241,790 = 0.91

Machine A should be purchased as it has a positive NPV as well as PI greater than 1.