Question

Exercise 24-4 BAK Corp. IS CO gider ng purc 85 ng cre of two new diegrostic mech nes. Either machine would moke it poss ble or the company to d on Jobs thetit current y isn't equipped to do. tst mstes egarong esch mechine ne prov ded below MachineA Hachine tB Crignal coat 74.600 182,000 Eztimsted life 8 years 8 years Selvage value 20,000 240,200 Cstimated anrual cash outfiows 5,170 10,190 Calea ate the ret prese t veh e ar pr ts ilty index of each mechre. Assurme·9% Kount rate If the net present valuers negative use eithera negative s gn prece ng the nomber eg 45 or parentheses eg 45 profitability index to 2 decimal places, e 10.50. For calculatin purposes, use 5 decimal places as displayed in the factor table provided.) Round answer or present va ue to O decamal places e.g. 125 a Net present value Profitabiity index Which machine should be purchased should be purchased.

Answer 1

	Machine A
Year	Item	Cash flow	PV factor at 9%	Discounted cash flow at 9%
0	Original cost	(74,600)	1	(74,600)
1 - -8	Net annual cash inflow ( $ 20,000 - $ 5,170)	14,830	5.53482	82,081
	Net Present Value (NPV)			7,481
	Profitability index = ( $ 82,081 / $ 74,600) = 1.10
	Machine B
Year	Item	Cash flow	PV factor at 9%	Discounted cash flow at 9%
0	Original cost	(182,000)	1	(182,000)
1 - -8	Net annual cash inflow ( $ 40,200 - $ 10,190)	30,010	5.53482	166,100
	Net Present Value (NPV)			(15,900)
	Profitability index = ( $ 166,100 / $ 182,000) = 0.91
		Machine A	Machine B
	Net Present Value	7,481	(15,900)
	Profitability Index	1.10	0.91
	Machine A should be purchase since it has a positive NPV.