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 $77,000 $188,000
Estimated life 8 years 8 years
Salvage value 0 0
Estimated annual cash inflows $19,900 $40,200
Estimated annual cash outflows $4,800 $9,860
PV table
(n) Periods4%5%6%7%8%9%10%11%12%15%?01.000001.000001.000001.000001.000001.000001.000001.000001.000001.00000?11.040001.050001.060001.070001.080001.090001.100001.110001.120001.15000?21.081601.102501.123601.144901.166401.188101.210001.232101.254401.32250?31.124861.157631.191021.225041.259711.295031.331001.367631.404931.52088?41.169861.215511.262481.310801.360491.411581.464101.518071.573521.74901?51.216651.276281.338231.402551.469331.538621.610511.685061.762342.01136?61.265321.340101.418521.500731.586871.677101.771561.870411.973822.31306?71.315931.407101.503631.605781.713821.828041.948722.076162.210682.66002?81.368571.477461.593851.718191.850931.992562.143592.304542.475963.05902?91.423311.551331.689481.838461.999002.171892.357952.558032.773083.51788101.480241.628891.790851.967152.158922.367362.593742.839423.105854.04556111.539451.710341.898302.104852.331642.580432.853123.151763.478554.65239121.601031.795862.012202.252192.518172.812673.138433.498453.895985.35025131.665071.885652.132932.409852.719623.065813.452273.883284.363496.15279141.731681.979932.260902.578532.937193.341733.797504.310444.887117.07571151.800942.078932.396562.759033.172173.642484.177254.784595.473578.13706161.872982.182872.540352.952163.425943.970314.594975.310896.130399.35762171.947902.292022.692773.158823.700024.327635.054475.895096.8660410.76126182.025822.406622.854343.379933.996024.717125.559926.543557.6899712.37545192.106852.526953.025603.616534.315705.141666.115917.263348.6127614.23177202.191122.653303.207143.869684.660965.604416.727508.062319.6462916.36654
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?
_____ should be purchased.
| Machine A | |||||||||
| Cash | * | 9% discount | = | Present | |||||
| Flows | factor | Value | |||||||
| present value of net annual cash flows | 15100 | * | 5.53482 | = | 83576 | ||||
| present value of salvage value | 0 | * | 0.50187 | = | 0 | ||||
| 83576 | |||||||||
| capital investment | 77,000 | ||||||||
| Net present value | 6576 | ||||||||
| profitability index | = | 83576/77000 | |||||||
| 1.09 | |||||||||
| Machine B | |||||||||
| Cash | * | 9% discount | = | Present | |||||
| Flows | factor | Value | |||||||
| present value of net annual cash flows | 30340 | * | 5.53482 | = | 167926 | ||||
| present value of salvage value | 0 | * | 0.50187 | = | 0 | ||||
| 167926 | |||||||||
| capital investment | 188,000 | ||||||||
| Net present value | -20074 | ||||||||
| profitability index | = | 167926/188000 | |||||||
| 0.89 | |||||||||
| 2) | Machine A should be purchased | ||||||||
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