Exercise 24-4 Open Show Work Exercise 24-4 BAK Corp. is considering purchasing o
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Exercise 24-4
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Exercise 24-4
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 Machine B Original cost $78,200 $182,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $19,800 $39,600 Estimated annual cash outflows $5,130 $10,180
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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 Net present value Profitability index
Which machine should be purchased?
Machine BMachine A
should be purchased. Click if you would like to Show Work for this question:Open Show Work
Explanation / Answer
machine A Capital investment -78200 annual cash inflow (19800-5130)*5.53482 81196 Net present value 2996 Machine B Capital investment -182000 annual cash inflow (39600-10180)*5.53482 162834 Net present value -19166 profitability index present value of cash inflow/capital investment Machine A= 81196/78200 1.04 Machine B = 162834/182000 0.89 Machine A Machine B Net present value 2996 -19166 profitability index 1.04 0.89 Machine A should be purchased
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