BAK Corp. is considering purchasing one of two new diagnostic machines. Either m
ID: 2593185 • 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 $75,500 8 years Machine B $180,000 8 years Original cost Estimated life Salvage value Estimated annual cash inflows Estimated annual cash outflows $20,000 $5,000 $40,000 $10,000 Click here to view PV table 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 Net present valueExplanation / Answer
Machine A
Present value of net annual cash flows ($20000- 5000 ) x 5.53482 = $83022 present value
Present value of salvage value $0 x 0.50187 = 0
Capital investment 75500
Net present value $7522
Profitability index: $83022/ 75500 = 1.09
Machine B
Present value of net annual cash flows ($40000 - 10000) x 5.53482 = $166045 present value
Present value of salvage value $0 x 0.50187 = 0
Capital investment 180000
Net present value $(13955)
Profitability index: $166045 / 180000 = 0.92
Note: You should be able to find 5.53482 and 0.5018 in the viewable factor table.
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