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		$ 74,600		$ 182,000
Estimated life		8 years		8 years
Salvage value		0		0
Estimated annual cash inflows		$ 20,000		$ 40,200
Estimated annual cash outflows		$ 5,170		$ 10,190

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 value		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places
Profitability index		enter the Profitability index rounded to 2 decimal places		enter the Profitability index rounded to 2 decimal places

Answer 1

Solution:

Computation of NPV and Profitability Index
			Machine A		Machine B
Particulars	Period	PV Factor (9%)	Amount	Present Value	Amount	Present Value
Cash outflows:
Initial investment	0	1	$74,600	$74,600	$1,82,000	$1,82,000
Present Value of Cash outflows (A)				$74,600		$1,82,000
Cash Inflows:
Net Annual cash inflows (Inflows-Outflows)	1-8	5.53482	$14,830.00	$82,081	$30,010	$1,66,100
Present Value of Cash Inflows (B)				$82,081		$1,66,100
Net Present Value (NPV) (B-A)				$7,481		-$15,900
Profitability Index (Present value of cash inflows / Present value of cash outflows)				1.10		0.91