BAK Corp. is considering purchasing one of two new diagnostic machines. Either m
ID: 2536247 • Letter: B
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 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.)
Explanation / Answer
a)Calculation of net present value of Machine A: Time Cashflow PVF @9% PV - -78200 1.00 -78,200.00 1.00 14670 0.9174 13,458.72 2.00 14670 0.8417 12,347.45 3.00 14670 0.7722 11,327.93 4.00 14670 0.7084 10,392.60 5.00 14670 0.6499 9,534.49 6.00 14670 0.5963 8,747.24 7.00 14670 0.5470 8,024.99 8.00 14670 0.5019 7,362.38 2,995.80 Net present value of Machine A is $2996 Calculation of net present value of Machine B: Time Cashflow PVF @9% PV - -182000 1.00 -1,82,000.00 1.00 29420 0.9174 26,990.83 2.00 29420 0.8417 24,762.23 3.00 29420 0.7722 22,717.64 4.00 29420 0.7084 20,841.87 5.00 29420 0.6499 19,120.98 6.00 29420 0.5963 17,542.18 7.00 29420 0.5470 16,093.75 8.00 29420 0.5019 14,764.91 -19,165.62 Net present value of Machine B is -$19166 Profitability index=Present value of future cash inflows/initial investment b) Calulation of profitability index: Profitability index= (net present value+initial investment)/initial investment Profitability index of A= (2996+78200)/78200=1.04 Profitability index of B= (-19166+1820000/182000=0.89 Note: Cash flow= cash inflow-cash outflow
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