CALCULATOR FULL SCREEN PRINTER VERSION ·BACK RET Exercise 24-4 BAK Corp. is cons

Question

CALCULATOR FULL SCREEN PRINTER VERSION ·BACK RET Exercise 24-4 BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine it currently isn't equipped to do. Estimates regarding each machine are provided below. would make it possible for the company to bid on jobs that Machine A $76,700 8 years Machine B $188,000 8 years Original cost Estimated life Salvage value Estimated annual cash inflows Estimated annual cash outflows $20,100 $40,200 $10,130 $4,910 present value is negative, use Calculate the net present value and profitability index of each machine. either a negative sign preceding the number 125 and profitability index to 2 decimal pl table provided.) Assume a 9% discount rate. (ir the net eg -45 or parentheses eg (45). Round answer for aces, e.g. 10.50. For calcul lation purposes, use 5 decimal places as displayed in the factor Machine B Profitability index Which machine should be purchased? should be purchased 22168 JUN 9

Explanation / Answer

Solution:

Net annual cash inflows :

Machine A = $20,100 - $4,910 = $15,190

Machine B = $40,200 - $10,130 = $30,070

NPV is postitive for Machine A, therefore Machine A shoule be purchased.

Compuation of NPV and Profitability Index Particulars Period PV Factor Machine A Machine B Amount Present value Amount Present value Cash Outflows: Initial Cost 0 1 $76,700 $76,700 $188,000 $188,000 Present value of cash outflows (A) $76,700 $188,000 Cash Inflows: Annual Cash Inflows 1-8 5.53482 $15,190 $84,074 $30,070 $166,432 Present Value of cash inflows (B) $84,074 $166,432 NPV (B-A) $7,374 -$21,568 Profitability Index (B/A) 1.10 0.89

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