PROBLEM 1: BAK Corp. is considering purchasing one of two new diagnostic machine

Question

PROBLEM 1:

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.)

Which machine should be purchased?

PROBLEM 2: Swift Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $134,000 and will increase annual expenses by $69,000 including depreciation. The oil well will cost $445,000 and will have a $11,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return. (Round answer to 2 decimal places, e.g. 12.47.)

Machine A Machine B Original cost $76,000 $183,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $20,000 $39,600 Estimated annual cash outflows $5,140 $10,090

Explanation / Answer

1) Year Machine A Machine B Cash inflow PVIF @ 9% PV of Cash inflow Cash inflow PVIF @ 9% PV of Cash inflow 1 14860               0.9174               13,633 29510              0.9174                  27,073 (20000-5140) (39600-10090) 2 14860               0.8417               12,507 29510              0.8417                  24,838 3 14860               0.7722               11,475 29510              0.7722                  22,787 4 14860               0.7084               10,527 29510              0.7084                  20,906 5 14860               0.6499                 9,658 29510              0.6499                  19,179 6 14860               0.5963                 8,861 29510              0.5963                  17,596 7 14860               0.5470                 8,129 29510              0.5470                  16,143 8 14860               0.5019                 7,458 29510              0.5019                  14,810 Total               82,247              1,63,333 (-) PV of cash outflow -76000 -183000 NPV                 6,247                -19,667 Profitability index = PV of cash inflow / PV of cash outflow Machine A = $82247/$76000 = 1.08 Machine B = $163333/$183000 = 0.89 2) Simple rate of return = net income / cost of investment Net income = $134000-$69000 = $65000 cost of investment = $445000 Simple rate of return = $65000/$445000 = 14.61%

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