Exercise 24-4 BAK Corp. is considering purchasing one of two new diagnostic mach

Question

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 t Machine A $77,300 8 years Machine B $180,000 8 years Original cost Estimated life Salvage value Estimated annual cash inflows Estimated annual cash outflows $20,200 $4,970 $40,000 $9,860 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 pre decimal places, e.o. 125 and profitability index to 2 decimal places, eg. 10.50. For calculation purposes, use 5 decimal places as displayed in the factor table Machine A Machine B Net present value Profitability index Which machine should be purchased? should be purchased. Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

Machine A: Net annual cash flows 15230 =20200-4970 Present value of annual net cash inflows 84295 =15230*5.53482 Less: Investment 77300 Net present value 6995 Profitability index = 84295/77300= 1.09 Machine B: Net annual cash flows 30140 =40000-9860 Present value of annual net cash inflows 166819 =30140*5.53482 Less: Investment 180000 Net present value -13181 Profitability index = 166819/180000= 0.93

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