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 each machine are provided below Machine A $77,960 8 years Machine B $189,400 8 years Original cost Estimated life Salvage value Estimated annual cash inflows Estimated annual cash outflows $40,000 $10,000 $19,910 $5,160 k her ew (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) 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 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.) Machine A Machine B Net present value Profitability index

Explanation / Answer

Answer:

Machine A
Present value of net annual cash flows ($19910 - 5160 ) x 5.53482 = $81639 Present value
Present value of salvage value $0 x 0.50187 = 0
Capital investment 77,960
Net present value $3679 (81639-77960)
Profitability index: $81639 / 77,960 = 1.05

Machine B
Present value of net annual cash flows ($40,000 - 10,000) x 5.53482 = $166045 present value
Present value of salvage value $0 x 0.50187 = 0
Capital investment 189400
Net present value $(23355) (166045-189400)
Profitability index: $166045 / 189400 = 0.88

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