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BAK Corp. is considering purchasing one of two new diagnostic machines. Either m

ID: 2591393 • 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.

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 Original cost $78,000 $184,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $19,800 $40,300 Estimated annual cash outflows $4,820 $10,160

Explanation / Answer

Statement showing Cash flows Machine A Machine B Particulars Time PVf 9% Amount PV Cash Outflows                               -                            1.00         (78,000.00)         (78,000.00)       (184,000.00)       (184,000.00) PV of Cash outflows = PVCO         (78,000.00)       (184,000.00) Cash inflows                          1.00                     0.9174            14,980.00            13,743.12            30,140.00            27,651.38 Cash inflows                          2.00                     0.8417            14,980.00            12,608.37            30,140.00            25,368.23 Cash inflows                          3.00                     0.7722            14,980.00            11,567.31            30,140.00            23,273.61 Cash inflows                          4.00                     0.7084            14,980.00            10,612.21            30,140.00            21,351.94 Cash inflows                          5.00                     0.6499            14,980.00              9,735.97            30,140.00            19,588.93 Cash inflows                          6.00                     0.5963            14,980.00              8,932.08            30,140.00            17,971.50 Cash inflows                      7.0000                     0.5470       14,980.0000         8,194.5730       30,140.0000       16,487.6121 Cash inflows                      8.0000                     0.5019       14,980.0000         7,517.9569       30,140.0000       15,126.2497 PV of Cash Inflows =PVCI       82,911.5903     166,819.4481 NPV= PVCI - PVCO                    4,912               (17,181) PI = PVCI/PVCO                      1.06                      0.91 Machine A Machine B Net present value                        4,912                   (17,181) Profitability index                          1.06                          0.91