Question

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

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

Homework Answers

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
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