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. 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?

Explanation / Answer

Details MAchine A Machine B Annual Cash inflows            19,780           39,790 Annual Cash outflows              5,170           10,100 Net Annual Cash flow            14,610           29,690 NPV Calculation Machine A Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Investment           (77,670) Net Annual Cash flow           14,610     14,610     14,610 14,610     14,610      14,610    14,610    14,610 Net Cash flows           (77,670)           14,610     14,610     14,610 14,610     14,610      14,610    14,610    14,610 PV factor @9%                      1             0.917       0.842        0.772      0.708       0.650         0.596       0.547      0.502 PV of Net Cash flows         (77,670)           13,404     12,297     11,282 10,350       9,495         8,711       7,992      7,332 NPV = $    3,193.71 PV of Cash inflows $ 80,863.71 PV Of Investment $ 77,670.00 Profitability Index=PV of Cash Inflows/PV of Investment=                1.04 NPV Calculation Machine B Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Investment         (181,000) Net Annual Cash flow           29,690     29,690     29,690 29,690     29,690      29,690    29,690    29,690 Net Cash flows         (181,000)           29,690     29,690     29,690 29,690     29,690      29,690    29,690    29,690 PV factor @9%                      1             0.917       0.842        0.772      0.708       0.650         0.596       0.547      0.502 PV of Net Cash flows       (181,000)           27,239     24,989     22,926 21,033     19,296      17,703    16,241    14,900 NPV = $ (16,671.2) PV of Cash inflows         164,329 PV Of Investment         181,000 Profitability Index=PV of Cash Inflows/PV of Investment=                0.91 Details Machine A Machine B NPV $      3,193.7 $ (16,671.2) PI                1.04                0.91 Machine A should be purchased.

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