Question

Bonita Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it...

Bonita 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 \$77,500 \$186,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows \$19,500 \$39,600 Estimated annual cash outflows \$5,040 \$9,800

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 Profitability index

Which machine should be purchased?

 a. Machine B b. Machine A should be purchased.

Computation of Present Values:

1. Machine A:
 Year Cash flows PV factor at 9% Discounted Cashflows 0 -77,500 1.0000 -77,500.00 1-8 14,460# 5.5348 +80,033.20 NPV 2,533.20

#Cash outflow - Cash inflow = 19500-5040

2. Machine B:
 Year Cash flows Discount factor @ 9% Discounted cashflows 0 -186,000 1.0000 -186,000.00 1-8 29,800 5.5348 164,937.04 NPV -21,062.96

Profitability Index: PV of cash inflows/Intial Outlay

• Machine A:80,033.20/77,500 = 1.03
• Machine B: 164,937.04/186,000 = 0.89

Since NPV of Machine A as well as the profitabilty index is higher than Machine B, it is recommended to purchase machine A.

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