Carpenter Motors is considering purchasing one of two new processing machines. Either machine would make it possible for the company to produce its products more efficiently than it is currently equipped to do. Estimates regarding each machine are provided below:
Instructions (a) Calculate the net present value and profitability index of each machine. Assume an 8% discount rate. Which machine should be purchased?
Machine A
Net cash flow = $30,000 - $7,500 = $22,500
Net present value
Present value of net cash flows
$22,500 x 2.158924997 = $48575.81
Less: initial investment (113,250.00)
Net present value ($64674.19 )
Profitability Index =$64674.19 /$113,250 = 0.57
Machine B
Net cash flow = $60,000-$15,000 = $45,000
Net present value
Present value of net cash flows
$45,000 x 2.158924997 = $97151.62
Less: initial investment (270,000.00)
Net present value ($ 172848.38)
Profitability Index $ 172848.38/$270,000 = 0.64
Can anyone please confirm if the answer is correct
Machine A | | Machine B | |||||
| Original cost | $113250 | 27,000 | |||||
| Estimated life | 10 years | 10 years | |||||
| Salvage value | Nil | Nil | |||||
| Estimated annual cash inflows | $30,000 | 60000 | |||||
| Estimated annual cash outflows | $ 7,500 | 15000 |
Instructions (a) Calculate the net present value and profitability index of each machine. Assume an 8% discount rate. Which machine should be purchased?
Machine A
Net cash flow = $30,000 - $7,500 = $22,500
Net present value
Present value of net cash flows
$22,500 x 2.158924997 = $48575.81
Less: initial investment (113,250.00)
Net present value ($64674.19 )
Profitability Index =$64674.19 /$113,250 = 0.57
Machine B
Net cash flow = $60,000-$15,000 = $45,000
Net present value
Present value of net cash flows
$45,000 x 2.158924997 = $97151.62
Less: initial investment (270,000.00)
Net present value ($ 172848.38)
Profitability Index $ 172848.38/$270,000 = 0.64
Can anyone please confirm if the answer is correct