Question -
Arrow 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
|
$78,250
|
$183,600
|
|
Estimated life
|
8 years
|
8 years
|
|
Salvage value
|
0
|
0
|
|
Estimated annual cash inflows
|
$20,450
|
$40,010
|
|
Estimated annual cash outflows
|
$4,960
|
$10,000
|
a. Calculate the net present value and profitability index of each machine. Assume a 9% discount rate.
b. Which machine should be purchased?