Exercise 12-4 (also in your book at end of chapter)

BAK 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 isnt equipped to do.

Estimates regarding each machine are provided here:
	Machine A	Machine B
Original cost	75,500	180,000
Estimated Life	8 years	8 years
Salvage Value	-0-	-0-
Estimated Annual cash IN-flows	$20,000	$40,000
Estimated Annual Cash OUT-flows	$5,000	$10,000

Instructions

Calculate the net present value and profitability index of each machine. (Assume a 9% discount rate). Which machine should be purchased?

Machine A	Cash Flows	9% Discount Factor	Present Value $
Present value of net annual cash flows
LESS: Capital Investment	-----	-----
Net Present Value	-----	-----

Profitability Index (A) = ______________________

Machine B	Cash Flows	9% Discount Factor	Present Value $
Present value of net annual cash flows
LESS: Capital Investment	-----	-----
Net Present Value	-----	-----

Profitability Index (B) = ______________________

Note: Answer this in complete sentence(s) using good grammar AS IF the BIG bosses of your company will review it. (Do NOT write like you (and moi) talk).

Your recommendation AND reasons: