BAK Corp. is considering purchasing one of two new diagnostic machines. Either m
ID: 2591393 • 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.
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 $78,000 $184,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $19,800 $40,300 Estimated annual cash outflows $4,820 $10,160Explanation / Answer
Statement showing Cash flows Machine A Machine B Particulars Time PVf 9% Amount PV Cash Outflows - 1.00 (78,000.00) (78,000.00) (184,000.00) (184,000.00) PV of Cash outflows = PVCO (78,000.00) (184,000.00) Cash inflows 1.00 0.9174 14,980.00 13,743.12 30,140.00 27,651.38 Cash inflows 2.00 0.8417 14,980.00 12,608.37 30,140.00 25,368.23 Cash inflows 3.00 0.7722 14,980.00 11,567.31 30,140.00 23,273.61 Cash inflows 4.00 0.7084 14,980.00 10,612.21 30,140.00 21,351.94 Cash inflows 5.00 0.6499 14,980.00 9,735.97 30,140.00 19,588.93 Cash inflows 6.00 0.5963 14,980.00 8,932.08 30,140.00 17,971.50 Cash inflows 7.0000 0.5470 14,980.0000 8,194.5730 30,140.0000 16,487.6121 Cash inflows 8.0000 0.5019 14,980.0000 7,517.9569 30,140.0000 15,126.2497 PV of Cash Inflows =PVCI 82,911.5903 166,819.4481 NPV= PVCI - PVCO 4,912 (17,181) PI = PVCI/PVCO 1.06 0.91 Machine A Machine B Net present value 4,912 (17,181) Profitability index 1.06 0.91
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