ercise Bailey Corporation is considering purchasing one of two new processing ma

Question

ercise Bailey Corporation is considering purchasing one of two new processing machines machine would make it possible for the company to produce its products more eff it is currently equipped to do. Estimates regarding each machine are provided belo Machine A $113,250 10 years Machine B $270,000 10 years Original cost Estimated life Salvage value Estimated annual cash inflows Estimated annual cash outflows 0- $30,000 7,500 $60,000 $15,000 Instructions . Calculate the net present value and profitability index of each machine. Assume an 8% discount rate. Which machine should be purchased? Bailey Corporation did some further research and found one other possible machine that woulo produce the same type of production efficiencies. The information regarding Machine Cis below: Machine c $250,000 Original cost

Explanation / Answer

Req 1: MachineA MachineB Annual cash inflws 30000 60000 Less: Annual cash outflows 7500 15000 Nnet cash inflows 22500 45000 Annuity factor for 10 yrs at 8% 6.7101 6.7101 Present value of inflows 150977.3 301954.5 Less: Initial Investment 113250 270000 Net present value 37727.25 31954.5 Profitability index MachineA MachineB Annual cash inflws 30000 60000 Less: Annual cash outflows 7500 15000 Nnet cash inflows 22500 45000 Annuity factor for 10 yrs at 8% 6.7101 6.7101 Present value of inflows 150977.3 301954.5 Divide: Initial Investment 113250 270000 Profitability Index 1.33 1.12 Req 2: MachineC Annual cash inflws 45000 Less: Annual cash outflows 10000 Nnet cash inflows 35000 Annuity factor for 10 yrs at 8% 6.7101 Present value of inflows 234853.5 Present value of salvage 13896 Total present value of inflow 248749.5 Less: Initial Investment 250000 Net present value -1250.5 Profitability Index MachineC Annual cash inflws 45000 Less: Annual cash outflows 10000 Nnet cash inflows 35000 Annuity factor for 10 yrs at 8% 6.7101 Present value of inflows 234853.5 Present value of salvage 13896 Total present value of inflow 248749.5 Divide: Initial Investment 250000 Profitability Index. 0.99 Ranking as per NV: Pank-1 Machine A Rank-2 Machine B Rank-3 Machine C Ranking as per PI Pank-1 Machine A Rank-2 Machine B Rank-3 Machine C Hence, Machine-A shall be selected.

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.