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 annual cash inflows $30,000 $60,000

Estimated annual cash outflows $ 7,500 $15,000

Instructions

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

Calculate the net present value and profitability index for Machine C. Use an 8% discount rate.

Rank the investments based on net present value. Which machine would be chosen based on this calculation, Machine A, B, or C?

Rank the investments based on profitability index. Which machine would be chosen based on this calculation, Machine A, B, or C?

Which machine should be purchased based on all the information provided? Discuss your reasons why.