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BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it...

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Accounting

BAK Corp. is considering purchasing one of two new diagnosticmachines. Either machine would make it possible for the company tobid on jobs that it currently isn’t equipped to do. Estimatesregarding each machine are provided below. Machine A Machine BOriginal cost $77,700 $181,000 Estimated life 8 years 8 yearsSalvage value 0 0 Estimated annual cash inflows $20,500 $40,400Estimated annual cash outflows $5,070 $10,000 Click here to view PVtable. Calculate the net present value and profitability index ofeach machine. Assume a 9% discount rate. (If the net present valueis negative, use either a negative sign preceding the number eg -45or parentheses eg (45). Round answer for present value to 0 decimalplaces, e.g. 125 and profitability index to 2 decimal places, e.g.10.50. For calculation purposes, use 5 decimal places as displayedin the factor table provided.) Machine A Machine B Net presentvalue Profitability index Which machine should be purchased? shouldbe purchased.

Answer & Explanation Solved by verified expert
4.3 Ratings (667 Votes)

Solution

Machine A Machine B
Net present value $           7,702 $         (12,741)
Profitability index                  1.10                    0.93

.

Which machine should be purchased- Machine A

Working

Machine A
Year Cash inflow Cash outflow Net cash inflow PVA factor Present value of all cash inflow
1-8.. $   20,500.00 $       5,070.00 $   15,430.00 5.53482 $        85,402.27
Less: Initial Investment $      (77,700.00)
Net Present Value $           7,702.27

.

Machine B
Year Cash inflow Cash outflow Net cash inflow PVA factor Present value of all cash inflow
1-8.. $   40,400.00 $     10,000.00 $   30,400.00 5.53482 $      168,258.53
Less: Initial Investment $    (181,000.00)
Net Present Value $      (12,741.47)

Profitability index = Present value of cash flows/ Initial investment
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