Question

--/1 Question 2 View Policies Current Attempt in Progress 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 $75,500 $180,000 Estimated life 8 years 8 years Salvage value Estimated annual cash inflows $20,000 $40,000 Estimated annual cash outflows $5,000 $10,000 Click here to view PV 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 Profitability index Which machine should be purchased? should be purchased.

Answer 1

L L Machine NPU - Cresent Value of Cash Inflow - Original Cost Net estimated annual Cash Inflows E - Estimated annual - Estimated annual orca Coun Inflowes Cash Outflows. = $ 20000 - 5000 $ 15000 Prevent value of Cach Inflans- - Estimated net X Present Value annual Cash Inflows factor for 8 years u que

= 15000 X 5.5348 $ 83. 02.1 NPV = 183022 - 1 75500 = $ 7500 brofitability Inder - bossent Value of nut Cars Infos Original Cast 1 83ood f75500 Cash I fosse I 10000" Machine B- Net Estimated annual = $ 40000 - - $ 30000 Present value of net 8 30000 X annual Cash 5.53482 Inflous- NPU = $ 166045 - I 180000 - $ 13955 Index = $166045 $180000 6.92 Profitability
Machine A should be purchased as it is having positive NPV and profitability index higher than 1.