Exercise 26-4 BAK Corp. is considering purchasing one of two new diagnostic mach
ID: 2585313 • Letter: E
Question
Exercise 26-4 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 $78,440 $187,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $19,750 $40,260 Estimated annual cash outflows $4,990 $9,920
a. 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.)
Explanation / Answer
Machine A: Present value of annual cash flows 81694 =(19750-4990)*5.53482 Less: Investment 78440 Nert present value 3254 Profitability index = 81694/78440= 1.04 Machine B: Present value of annual cash flows 167926 =(40260-9920)*5.53482 Less: Investment 187000 Nert present value -19074 Profitability index = 167926/187000= 0.90
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