BAK Corp. is considering purchasing one of two new diagnostic machines. Either m
ID: 3053330 • 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 Machine B Original cost $77,300 $180,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $20,200 $40,000 Estimated annual cash outflows $4,970 $9,860 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.)
Explanation / Answer
Machine A
Present value of net annual cash flows ($20,470 - 4,820 ) x 5.53482 = $86,620 present value
Present value of salvage value $0 x 0.50187 = 0
Capital investment 77,960
Net present value $8,660
Profitability index: $86,620 / 77,960 = 1.11
Machine B
Present value of net annual cash flows ($40,470 - 10,100) x 5.53482 = $168,092 present value
Present value of salvage value $0 x 0.50187 = 0
Capital investment 187,200
Net present value $(19,108)
Profitability index: $168,092 / 187,200 = 0.90
Machine B should be rejected and Machine A should be purchased, because the Machine B has a negative net present value and a lower profitability index.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.