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.

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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?

Machine A Machine B Original cost $76,700 $183,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $20,200 $40,500 Estimated annual cash outflows $5,040 $9,870

Explanation / Answer

Machine A: Net annual cash flows = 20200-5040= 15160 Present value of annual cash flows 83908 =15160*5.53482 Less: Investment 76700 Net present value 7208 Profitability index =83908/76700= 1.09 Machine B: Net annual cash flows = 40500-9870= 30630 Present value of annual cash flows 169532 =30630*5.53482 Less: Investment 183000 Net present value -13468 Profitability index =169532/183000= 0.93 Machine A should be purchased.

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