Machine A Machine B Initial Investment $113,250 $270,000 Estimated life 10 years 10 years Salvage value -0- -0- Estimated annual cash inflows $30,000 60,000 Estimated annual cash outflows $ 7,500 $15,000 Instructions 1. Calculate the net present value and profitability index of each machine. Assume an 8% discount rate. Which machine should be purchased? Bailey Corporation did some further research and found one other possible machine that would produce the same type of production efficiencies. The information regarding Machine C is below: Machine C Initial Investment $250,000 Estimated life 10 years Salvage value $ 30,000 Estimated annual cash inflows $ 45,000 Estimated annual cash outflows $ 10,000 2. Calculate the net present value and profitability index for Machine C. Use an 8% discount rate. 3. Rank the investments based on net present value. Which machine would be chosen based on this calculation, Machine A, B, or C? 4. Rank the investments based on profitability index. Which machine would be chosen based on this calculation, Machine A, B, or C? 5. Which machine should be purchased based on all the information provided? Discuss your reasons why.
Machine A Machine B Initial Investment $113,250 $270,000 Estimated life 10 years 10 years Salvage value -0- -0- Estimated annual cash inflows $30,000 60,000 Estimated annual cash outflows $ 7,500 $15,000 Instructions 1. Calculate the net present value and profitability index of each machine. Assume an 8% discount rate. Which machine should be purchased? Bailey Corporation did some further research and found one other possible machine that would produce the same type of production efficiencies. The information regarding Machine C is below: Machine C Initial Investment $250,000 Estimated life 10 years Salvage value $ 30,000 Estimated annual cash inflows $ 45,000 Estimated annual cash outflows $ 10,000 2. Calculate the net present value and profitability index for Machine C. Use an 8% discount rate. 3. Rank the investments based on net present value. Which machine would be chosen based on this calculation, Machine A, B, or C? 4. Rank the investments based on profitability index. Which machine would be chosen based on this calculation, Machine A, B, or C? 5. Which machine should be purchased based on all the information provided? Discuss your reasons why.
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section10.A: Mutually Exclusive Investments Having Unequal Lives
Problem 4P
Related questions
Question
Bailey Corporation 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:
Machine A Machine B
Initial Investment $113,250 $270,000
Estimated life 10 years 10 years
Salvage value -0- -0-
Estimated annualcash inflows $30,000 60,000
Estimated annualcash outflows $ 7,500 $15,000
Instructions
1. Calculate thenet present value and profitability index of each machine. Assume an 8% discount
rate. Which machine should be purchased?
Bailey Corporation did some further research and found one other possible machine that would produce
the same type of production efficiencies. The information regarding Machine C is below:
Machine C
Initial Investment $250,000
Estimated life 10 years
Salvage value $ 30,000
Estimated annual cash inflows $ 45,000
Estimated annual cash outflows $ 10,000
2. Calculate the net present value and profitability index for Machine C. Use an 8% discount rate.
3. Rank the investments based on net present value. Which machine would be chosen based on this
calculation, Machine A, B, or C?
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:
Machine A Machine B
Initial Investment $113,250 $270,000
Estimated life 10 years 10 years
Salvage value -0- -0-
Estimated annual
Estimated annual
Instructions
1. Calculate the
rate. Which machine should be purchased?
Bailey Corporation did some further research and found one other possible machine that would produce
the same type of production efficiencies. The information regarding Machine C is below:
Machine C
Initial Investment $250,000
Estimated life 10 years
Salvage value $ 30,000
Estimated annual cash inflows $ 45,000
Estimated annual cash outflows $ 10,000
2. Calculate the net present value and profitability index for Machine C. Use an 8% discount rate.
3. Rank the investments based on net present value. Which machine would be chosen based on this
calculation, Machine A, B, or C?
4. Rank the investments based on profitability index. Which machine would be chosen based on this
calculation, Machine A, B, or C?
5. Which machine should be purchased based on all the information provided? Discuss your reasons
why.
calculation, Machine A, B, or C?
5. Which machine should be purchased based on all the information provided? Discuss your reasons
why.
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