Exercise 24-4 BAK Corp. is considering purchasing one of two new diagnostic mach

Question

Exercise 24-4 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 576.600 $187.000 Estimated life 3 years 8 years Salvage value Estimated annuel cash inflows $20,400 $40,400 Estimated annual cash outflows $5.190 $10,130 LA 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 o 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? V should be purchased. Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

Answer:

Machine A

Machine B

Net present value

7584.60

-19461.025

Profitability Index

1.1

0.9

Machine A- Should be purchased because positive NPV and also higher profitability Index

Working notes for the answer

Machine-A

Initial Investment

-76600

Estimated annual cash inflow

20400

Less:

Estimated annual cash outflow

5190

Estimated annual cash flow

15210

Machine -A

Year

Cash
flow

Pv factor
at 9%

Present
value

A

B

C=A*B

0

-76600

1

-76600

1

15210

0.917431

13954.13

2

15210

0.84168

12801.95

3

15210

0.772183

11744.91

4

15210

0.708425

10775.15

5

15210

0.649931

9885.456

6

15210

0.596267

9069.226

7

15210

0.547034

8320.391

8

15210

0.501866

7633.386

NPV

7584.599

Profitability Index for machine A

=Present value of cash inflow / Present value of cash outflow

=84184.6 /76600

=1.09902

=1.10

____________________________

Machine-B

Initial Investment

-187000

Estimated annual cash inflow

40,400

Less:

Estimated annual cash outflow

10130

Estimated annual cash flow

30270

Machine -B

Year

Cash
flow

pV factor
at 9%

Prasent
value

A

B

C=A*B

0

-187000

1

-187000

1

30270

0.917431

27770.64

2

30270

0.84168

25477.65

3

30270

0.772183

23373.99

4

30270

0.708425

21444.03

5

30270

0.649931

19673.42

6

30270

0.596267

18049.01

7

30270

0.547034

16558.73

8

30270

0.501866

15191.49

NPV

-19461

Profitability Index for machine B

=Present value of cash inflow / Present value of cash outflow

=167539 /187000

=0.89593

=0.90

Machine A

Machine B

Net present value

7584.60

-19461.025

Profitability Index

1.1

0.9

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