Answer:
a) For MACHINE A
Net Present Value (NPV) 7208
Internal Rate of Return (IRR) 11,48%
For MACHINE B
Net Present Value (NPV) -13468
Internal Rate of Return (IRR) 6,99%
b)BAK Corp should buy MACHINE A
Explanation:
We use excel or a spreadsheet to calculate net present value and the profitability index of each machine. See document attached.
We use a cash flow to solve this problem.
At moment 0 we have the investment cost , in this case Original cost $76,700 $183,000 for Machine A and Machine B . From period 1 to period 8, we have inflows and outflow. (Estimated annual cash inflows $20,200 $40,500
Estimated annual cash outflows $5,040 $9,870).
Then, we calculate the Net cash flow that is the difference between benefits and cost.
We use all the result (positive and negative) in Net cash flow to get the profitability index, IRR.
