BAK Corp is considering purchasing one of two new diagnostic

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

Machine B

Original cost

$78,010

$180,900

Estimated life

8 years

8 years

Salvage value

0

0

Estimated annual cash inflows

$19,890

$39,820

Estimated annual cash outflows

$5,090

$9,930

Calculate the net present value and profitability index of each machine. Assume a 9% discount rate. Round answer for present value to 0 decimal places, e.g. 125 and profitability index to 2 decimal places, e.g. 10.50.)

Machine A

Machine B

Net present value

Profitability index

Which machine should be purchased?

.

		Machine A		Machine B
Original cost		$78,010		$180,900
Estimated life		8 years		8 years
Salvage value		0		0
Estimated annual cash inflows		$19,890		$39,820
Estimated annual cash outflows		$5,090		$9,930

Solution

Particulars Year Net Benefit Machine A Net Benefit Machine B PVF @ 9% PV Machine A PV Machine B Cash Outflows 0 -78010 -180900          1.00 (78,010.00) (1,80,900.00) Net Benefit 1 14800 29890          0.92 13,577.98      27,422.02 Net Benefit 2 14800 29890          0.84 12,456.86      25,157.81 Net Benefit 3 14800 29890          0.77 11,428.32      23,080.56 Net Benefit 4 14800 29890          0.71 10,484.69      21,174.83 Net Benefit 5 14800 29890          0.65     9,618.98      19,426.45 Net Benefit 6 14800 29890          0.60     8,824.76      17,822.43 Net Benefit 7 14800 29890          0.55     8,096.11      16,350.85 Net Benefit 8 14800 29890          0.50     7,427.62      15,000.78 Net Present Value     3,905.32     (15,464.26) Profitability Index           1.05              0.91