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 regarding each machine are provided below. Machine A Machine B Original cost $74,100 $183,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $20,500 $39,500 Estimated annual cash outflows $4,850 $10,020 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.) Machine A Machine B Net present value Profitability index Which machine should be purchased? should be purchased.

Explanation / Answer

Machine A Machine B Initial outflow 74100 183000 Net Annual inflow 15650 29480 PV oA F @ 9% 5.53482 5.53482 PV of net annual cash flows 86619.933 163166.4936 NPV(PV of net annual cash flow-Initial outflow) 12519.933 -19833.5064 Profitability Index= 1+NPV/Initial Investment 1+12519.933/74100 1+(-19833.506/183000) 1.16896 0.89162 Machine A should be purchased for its greater NPV & Profitability Index

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