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 $76,600 8 years Machine B $190,000 8 years Original cost Estimated life Salvage value Estimated annual cash inflows Estimated annual cash outflows $20,000 $5,140 $40,500 $10,100 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

Answer 1

	Machine A	Machine B
Net Present value	$     5,647	$           (21,741)
Profitability index	1.07	0.89

Working

Machine A

Year	Annual Cash Flow	NPV Factor at 9% Discount rate	Discounted Cash Flow
1	$         14,860.00	0.91743	$             13,633
2	$         14,860.00	0.84168	$             12,507
3	$         14,860.00	0.77218	$             11,475
4	$         14,860.00	0.70843	$             10,527
5	$         14,860.00	0.64993	$               9,658
6	$         14,860.00	0.59627	$               8,861
7	$         14,860.00	0.54703	$               8,129
8	$         14,860.00	0.50187	$               7,458
Present velue of Cash Inflows			$             82,247
Less: Initial Investment			$             76,600
Net Present value			$               5,647
Profitability index			1.07

Machine B

1	$         30,400.00	0.91743	$             27,890
2	$         30,400.00	0.84168	$             25,587
3	$         30,400.00	0.77218	$             23,474
4	$         30,400.00	0.70843	$             21,536
5	$         30,400.00	0.64993	$             19,758
6	$         30,400.00	0.59627	$             18,127
7	$         30,400.00	0.54703	$             16,630
8	$         30,400.00	0.50187	$             15,257
Present velue of Cash Inflows			$         1,68,259
Less: Initial Investment			$         1,90,000
Net Present value			$           (21,741)
Profitability index			0.89