| Machine A |
Machine B |
|
| Estimated annual cash inflows | 20490 | 40310 |
| Less: | ||
| Estimated annual cash outflows | 5030 | 9840 |
| Net Cash Flow | 15460 | 30470 |
| Estimated Year | 8 | 8 |
| PV factro @ 9% for 8 year PVIFA(8 year’9%) | 5.5348 | 5.5348 |
| 85568.008 | 168645.356 | |
| Less: | ||
| Initial Investment | 77830 | 184900 |
| NPV | 7738.008 | -16254.644 |
| Profitability index: = Cash Flow/Cost |
1.09942192 | 0.91208954 |
| (85568.008/77830) | (168645.36/184900) | |
Machine B should be rejected and Machine A should be purchased, because the Machine B has a negative net present value and a lower profitability index.
