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Anna 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 $106,000 $ 175,000
Estimated life 8 years 8 years
Salvage value -0- -0-
Estimated annual cash inflows $30,000 $45,000
Estimated annual cash outflows $10,000 $15,000
Calculate the net present value and profitability index of each machine. Assume a 9% discount rate. Which machine should be purchased?
Machine B has a negative net present value, and also a lower profitability index. Machine B should be rejected and machine A should be purchased.
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