PRINTE R VERSION NEXT Exercise 24-4 BAK Corp. is considering purchasing one of t

Question

PRINTE R VERSION NEXT 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 $75,900 8 years Machine B 181,000 8 years Original cost Estimated life Salvage value Estimated annual cash inflows Estimated annual cash outflows $19,900 $5,020 $39,800 $10,050 If the net present value is negative, use either a negative sign Calculate the net present value and profitability index of each machine. Assume a 9% discount rate. ( preceding the number eg -45 or parentheses eg (45). Round answer for places, e. present value to 0 decimal places e.g. 125 and profitablity index to 2 decimal g. 10.50. For calculation purposes, use 5 decimal places as display yed in the factor table provided.) Machine A Machine B Net present value Profitability index Which machine should be purchased? ' should be purchased EXERCESE Question Attempts: o of s used SAVE FOR LATER SUBNEY ANSWER PPT...pptx el

Explanation / Answer

Present value factor

= 1 / (1 + r) ^ n

Where,

r = Rate of discount = 9% or 0.09

n = Years = 1 to 8 years

So, PV Factor for year 2

= 1 / (1.09 ^ 2)

= 1 / 1.1881

= 0.84168

Similarly, other calculations are done in the following table

So, as per above calculations, Machine A is giving positive Net Present Value and a Profitability Index more than 1, So, Machine A should be purchased

Machine A Calculations Years 0 1 2 3 4 5 6 7 8 A Initial Investment    (75,900)                   -                     -                     -                     -                   -                   -                   -                   -   B Cash outflows                -            (5,020)          (5,020)          (5,020)          (5,020)       (5,020)       (5,020)       (5,020)       (5,020) C Cash Inflows                -            19,900          19,900          19,900          19,900       19,900       19,900       19,900       19,900 D = B + C Net Cash Flows                -            14,880          14,880          14,880          14,880       14,880       14,880       14,880       14,880 E PV Factor    1.00000       0.91743       0.84168       0.77218       0.70843     0.64993     0.59627     0.54703     0.50187 F = D x E PV of Inflows                -      13,651.38    12,524.20    11,490.09    10,541.37    9,670.98    8,872.46    8,139.87    7,467.77 G = Sum F Total PV of Inflows       82,358 H = G /(A) Profitability Index           1.09 I = A + G Net Present Value         6,458

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