BAK Corp. is considering purchasing one of two new diagnostic machines. Either m
ID: 2585633 • Letter: B
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 $76,900 8 years Machine B 186,000 8 years Original cost Estimsted life Salvage value Estimated annual eash inflows Estimated annual cash outflows $19,600 5,150 $39,800 10,080 Calculate the net present value and profitability index o each machine. Assume a 9% discount rate. If the net present value 1s negative, use ether a negatv e sign prece ing the number eg-45 or parentheses eg decimal places, e.g. 125 and profitability index to 2 decinmal places, e.g. 10.50. For calculation purposes, use 5 decimal places as displayed m the factor table provided.) 45 Round answer or present value to 0 Machine A Machine B Net present value Profitability index Which machine should be purchased? should be purchasedExplanation / Answer
Machine A : Original cost = 76,900
Annual Cash Inflows = 19,600 and Estimated Cash Outflow = 5,150
Multiplying both by PVAF(@9% for 8 years) i.e.5.5348
PV of inflows = 19,600*5.5348 = 108,482
PV of outflows = 5,150 * 5.5348 = 28,504
Total outlow = 28,504 + 76,900 = 105,404
NPV = 108,482 - 105,404 = 3,078
Profitability Index (PI) = PV of inflows / PV of outflows = 108,482 /105,404 = 1.029
Machine B: Original Cost = $186,000
Annual Cash Inflows = $39,800 and Estimated Cash Outflows = $10,080
PVAF (@9% for 8 years) = 5.5348
PV of cash inflows = 39800*5.5348 = $220,285
PV of cash outflows = 10,080*5.5348 = $55,790
Total cash Outflows = 55,790 + 186,000 = 241,790
NPV = 220,285 - 241,790 = (21,505)
PI = 220,285 / 241,790 = 0.91
Machine A should be purchased as it has a positive NPV as well as PI greater than 1.
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