BAK Corp. is considering purchasing one of two new diagnostic machines. Either m
ID: 2429908 • Letter: B
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.
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 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, A or B?
Explanation / Answer
Answer:
Machine-A
Machine-B
Net present value
4911.6
1.06
Profitability Index
-17180.6
0.91
Working notes for the above answer is as under
1)
First of all we will find Net cash flow as under
Machine A
Machine B
Estimated annual cash inflows
19800
40300
Less;
Estimated annual cash Outlaws
4820
10160
Net cash flow
14980
30140
Now We will find NPV as under
For Machine-A
year
Cash
Flow
Discount
Factor at 9%
Discounted
Cash Flow
A
B
C=A*B
0
1
0
1
14980
0.91743
13743.12
2
14980
0.84168
12608.37
3
14980
0.77218
11567.31
4
14980
0.70843
10612.21
5
14980
0.64993
9735.97
6
14980
0.59627
8932.08
7
14980
0.54703
8194.57
8
14980
0.50187
7517.96
Present value of cash low
82911.6
Less: Initial Investment
-78000.0
Net present value
4911.6
NPV of Machine -A =$4911.6
___________________________________
NPV of Machine -B
year
Cash
Flow
Discount
Factor at 9%
Discounted
Cash Flow
A
B
C=A*B
1
0
1
30140
0.91743
27651.38
2
30140
0.84168
25368.23
3
30140
0.77218
23273.61
4
30140
0.70843
21351.94
5
30140
0.64993
19588.93
6
30140
0.59627
17971.50
7
30140
0.54703
16487.61
8
30140
0.50187
15126.25
Present value of cash low
166819.4
Less: Initial Investment
-184000
Net present value
-17180.6
NPV of Machine -B is negative $ (17,180.6)
_______________________________________________________
2
Profitability index
=Present value of cash flow / Investment
For machine A
=82911.6/78000
=1.06
For Machine-B
=166819.4/184000
=0.91
____________________________________________________________
Machine -A should be purchased,
Machine-A
Machine-B
Net present value
4911.6
1.06
Profitability Index
-17180.6
0.91
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