Question Alternative A: To buy Machine Audi which is similar to the existing machine Alternative B: Go in for Machine Benz which is more expensive and has much greater capacity The cash flows at the present level of operations under the two alternatives are as follows: Year Machine Audi Machine Benz 0 (30500) (32000) 1 - 14500 2 9000 14500 3 19000. 14500 4 16000 14500 5 14000 14500
Alternative A: To buy Machine Audi which is similar to the existing machine
Alternative B: Go in for Machine Benz which is more expensive and has much greater capacity
The cash flows at the present level of operations under the two alternatives are as follows:
Year Machine Audi Machine Benz
0 (30500) (32000)
1 - 14500
2 9000 14500
3 19000. 14500
4 16000 14500
5 14000 14500
The company estimates that its cost of capital is 11%. At the end of year 5, Machine Audi will have a scrap value of $2500 which is not included in the table above. Machine Benz will not have any residual value
(d) Calculate the Profitability Index for Machine Audi.
(e) Calculate the
arrive at your final answer.)
(f) Write a brief report to the management to determine whether Albert Trading should buy any machine.
Given information :
| Year | Audi | Benz |
| 0 | $ (30,500.00) | $ (32,000.00) |
| 1 | $ - | $ 14,500.00 |
| 2 | $ 9,000.00 | $ 14,500.00 |
| 3 | $ 19,000.00 | $ 14,500.00 |
| 4 | $ 16,000.00 | $ 14,500.00 |
| 5 | $ 16,500.00 | $ 14,500.00 |
| Cost of capital | 11% | 11% |
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