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 to do. Estimates regarding each machine are provided below.

Click here to view the factor table.

(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 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.)

Which machine should be purchased?

Open Show Work

Machine A Machine B Original cost $78,270 $187,500 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $20,140 $39,530 Estimated annual cash outflows $4,840 $10,100

Explanation / Answer

Machine A

Net Present Value

Profitability Index

Machine B

Net Present Value and Profitability Index

Decision: Machine A with Positive Net Present Value 6413 and Profitability Index 1.08 more than 1 should be purchased.

Year 0 1 2 3 4 5 6 7 8 Initial Cost -78270 Estimated Annual Cash Inflows 20140 20140 20140 20140 20140 20140 20140 20140 Less: Estimated Annual Cash outflows -4840 -4840 -4840 -4840 -4840 -4840 -4840 -4840 Net Cash Flows 15300 15300 15300 15300 15300 15300 15300 15300 Present Value Factor @ 9% 1 0.91743 0.84168 0.77218 0.70843 0.64993 0.59627 0.54703 0.50187 Total (NPV) Present Value of cashflows -78270 14036.68 12877.7 11814.35 10838.98 9943.929 9122.931 8369.559 7678.611 6412.746 Net Present Value 6412.746 Net Present Value rounded off 6413

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