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 575,500 8 years Machine B $190,000 8 years Original cost Estimated life Salvage value Estimated annual cash inflows Estimated annual cash outflows $19,600 $40,000 $4,990 $9,970 Calculate the net present value and profitability index of each machine. Assume a9% 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 B has a lower PI and a Negative NPV. Hence it would be better to chose Machine A

Machine A Cash flow x Discount Factor = PV PV of net annual cash flows 14610 x 5.53482 = 80863.72 PV of Salvage values 0 x 0.50187 = 0 Capital Investment 75500 NPV 5363.72 Profitabilitly Index=80863.72/75500 = 1.071043 Machine B Cash flow x Discount Factor = PV PV of net annual cash flows 30030 x 5.53482 = 166210.6 PV of Salvage values 0 x 0.50187 = 0 Capital Investment 190000 NPV -23789.4 Profitabilitly Index=166210.6/190000 = 0.874793

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