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 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 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.) Machine A Machine B Net present value Profitability index Which machine should be purchased? should be purchased.

Explanation / Answer

Machine A: Present value of net annual cash flows 82301 =(20000-5140)*5.53842 Less: Capital investment 76000 Net present value 6301 Profitability index = 82301/76000= 1.08 Machine B: Present value of net annual cash flows 163439 =(39600-10090)*5.53842 Less: Capital investment 183000 Net present value -19561 Profitability index = 163439/183000= 0.89 Machine A should be purchased.

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