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 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.)

Which machine should be purchased?

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

Explanation / Answer

Machine A: Net annual cash flows 14670 =19800-5130 Present value of Net annual cash flows 81196 =14670*5.53482 Less: Investment 78200 Net present value 2996 Profitability index 1.04 =81196/78200 Machine B: Net annual cash flows 29420 =39600-10180 Present value of Net annual cash flows 162834 =29420*5.53482 Less: Investment 182000 Net present value -19166 Profitability index 0.89 =162834/182000 Machine A should be purchased

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