Question

Bramble 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 $78,300 $185,000 8 years 8 years Estimated life Salvage value 0 0 Estimated annual cash inflows $19,700 $39,900 Estimated annual cash outflows $5,040 $9,850 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 2840 18679 Profitability index 1.04 90 Which machine should be purchased? Machine A should be purchased

Answer 1

For machine A:

NPV=Present value of net cash flows-Initial value

Net cash flows=cash inflows-cash outflows=$19,700-$5,040

Net cash flows=$14,660

يا سالا Machine A Net cash flows Pv factor@9% Present value 14660 0.9174 13449.084 14660 0.8417 12339.3221 14660 0.7722 11320.452 14660 0.7084 10385.144 14660 0.6499 9527.534 14660 0.5963 8741.758 14660 0.547 8019.02 14660 0.5019 7357.854 Present value of Net cash flows (A) 81140.168 less:Initial value (B) 78300 Net present value (A)-(B) 2840.168

Thus, NPV of machine A=$2,840

Profitability index of machine A=Present value of cash inflows/Initial value

Profitability index of machine A=$81,140.168/$78,300

Profitability index of machine A=1.036 or 1.04

For machine B:

Net cash flows=$39,900-$9,850

Net cash flows=$30,050

يا سالا Machine B Net cash flows Pv factor@9% Present value 30050 0.9174 27567.87 30050 0.8417 25293.085 30050 0.7722 23204.61 30050 0.7084 21287.42) 30050 0.6499 19529.495 30050 0.5963 17918.815 30050 0.547 16437.35 30050 0.5019 15082.095 Present value of Net cash flows (A) 166320.74 less:Initial value (B) 185000 Net present value (A)-(B) - 18679.26

Thus ,NPV of machine B is -$18,679.

Profitability index of machine B=Present value of cash inflows/Initial value

Profitability index of machine B=$166,320.74/$185,000

Profitability index of machine B=0.90

Machine A should be purchased as NPV of machine A is positive whereas the NPV of machine B is negative as well as the profitability index of machine A is greater than Machine B.