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 currenty isnt equipped to do. Estimates regarding each machine are provided below, Machine A 575,500 e yeers Machine B $180,000 8 years Original cost Estimated life Salvage velue Estimated annual cash inflows Estimated annual cash outflows $5,000 $40,000 510,000 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 o decmal 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

Explanation / Answer

Machine A: Annual cash flows 15000 =20000-5000 Present value of annual cash flows 83022 =15000*5.53482 Less: Initial investment 75500 Net present value 7522 Profitability index = 83022/75500= 1.10 Machine B: Annual cash flows 30000 =40000-10000 Present value of annual cash flows 166045 =30000*5.53482 Less: Initial investment 180000 Net present value -13955 Profitability index =166045/180000= 0.92

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