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		$77,700		$181,000
Estimated life		8 years		8 years
Salvage value		0		0
Estimated annual cash inflows		$20,500		$40,400
Estimated annual cash outflows		$5,070		$10,000

Click here to view the factor 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

Calculation of NPV of Machine A

Period	Initial Cost	Cash Inflows	Cash Outflows	Net Cash Flows	P.V.A.F @ 9%	P.V @ 9%
0	-77,700			-77,700	1.00000	-77,700
1-8		20500	-5070	15,430	5.53482	85,402
					NPV	7,702

Calculation of NPV of Machine B

Period	Initial Cost	Cash Inflows	Cash Outflows	Net Cash Flows	P.V.A.F @ 9%	P.V @ 9%
0	-181,000			-181,000	1.00000	-181,000
1-8		40400	-10000	30,400	5.53482	168,259
					NPV	-12,741

Calculation of Profitability Index:

d) Profitability Index=
(NPV+ initial Investment)
Initial investment
	Machine A	Machine B
NPV	7,702	-12,741
Initial Investment	77,700	181,000
Total	85,402	168,259
PI	1.10	0.93