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. "Don't forget to view the PV table if needed."

Machine A: Original Cost: $74,000 Machine B: $179,000

Estimated life: 8 years Estimated life: 8 years   

Salavage value: 0 Salvage value: 0

Estimated annual cash inflows: $19,500 Estimated annual cash inflows: $39,500

Estimated annual cash outflows: $4,800 Estimated annual cash outflows: $9,800

Calculate the net present value and profitability index of each machine. Assume a 9% discount rate.

Machine A: Net present value ___________? Machine B: Net Present value ______________?

Profitability index ___________? Profitability index ____________________?

Which machine should be purchased? _____________

Answer 1

Machine A:
Net annual cash flows	14700	=19500-4800
Present value of Net annual cash flows	81362	=14700*5.53482
Less: Investment cost	74000
Net present value	7362
Profitability index	1.10	=81362/74000
Machine B:
Net annual cash flows	29700	=39500-9800
Present value of Net annual cash flows	164384	=29700*5.53482
Less: Investment cost	179000
Net present value	-14616
Profitability index	0.92	=164384/179000
Machine A should be purchased