Question

Ayayai 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 $74,000 $179,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $19,500 $39,500 Estimated annual cash outflows $4,800 $9,800 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 e.g. -45 or parentheses e.g. (45). Round answers 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

	Machine A	Machine B
Net Present value	7362	-14616
Profitability index	1.10	0.92
Machine A should be purchased
Workings:
Machine A:
Estimated annual cash inflows	19500
Estimated annual cash outflows	4800
Net annual cash flows	14700
Net annual cash flows	14700
X PV factor	5.53482
Present value of Net annual cash flows	81362
Less: Investment cost	74000
Net Present value	7362
Present value of Net annual cash flows	81362
Divided by Investment cost	74000
Profitability index	1.10
Machine B:
Estimated annual cash inflows	39500
Estimated annual cash outflows	9800
Net annual cash flows	29700
Net annual cash flows	29700
X PV factor	5.53482
Present value of Net annual cash flows	164384
Less: Investment cost	179000
Net Present value	-14616
Present value of Net annual cash flows	164384
Divided by Investment cost	179000
Profitability index	0.92