KSU Corp. is considering purchasing one of two new diagnostic machines. Either m
ID: 2489728 • Letter: K
Question
KSU 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.
Calculate the net present value and profitability index of each machine. Assume a 9% discount rate.
Machine A
Machine BNet present value$
$
Profitability index
Machine A Machine B Original cost $106,000 $175,000 Estimated life 8 years 8 years Salvage value -0- -0- Estimated annual cash inflows $30,000 $45,000 Estimated annual cash outflows $10,000 $15,000Explanation / Answer
Original cost 106000 175000 Life 8 8 Estimated Cash Inflows 30000 45000 Estimated Cash Outflows 10000 15000 Estimated net Cash inflows 20000 30000 Discount rate 9% 9% NPV = {Net Period Cash Flow/(1+R)^T} - Initial Investment R= Rate, t = time Year 1 18,348.62 27,522.94 Year 2 16,833.60 25,250.40 Year 3 15,443.67 23,165.50 Year 4 14,168.50 21,252.76 Year 5 12,998.63 19,497.94 Year 6 11,925.35 17,888.02 Year 7 10,940.68 16,411.03 Year 8 10,037.33 15,055.99 Present value 110,696.38 166,044.57 Less: original cost 106000 175000 NPV 4,696.38 (8,955.43) Profitability ondex = PV pf future cash flows / Original cost PI 1.04 0.95
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