Question

Net Present Value and Competing Projects

For discount factors use Exhibit 12B.1 and Exhibit 12B.2.

Spiro Hospital is investigating the possibility of investing in
new dialysis equipment. Two local manufacturers of this equipment
are being considered as sources of the equipment. After-tax cash
inflows for the two competing projects are as follows:

Year |
Puro Equipment |
Briggs Equipment |
||

1 | $320,000 | $120,000 | ||

2 | 280,000 | 120,000 | ||

3 | 240,000 | 320,000 | ||

4 | 160,000 | 400,000 | ||

5 | 120,000 | 440,000 |

Both projects require an initial investment of $560,000. In both cases, assume that the equipment has a life of 5 years with no salvage value.

**Required:**

Round present value calculations and your final answers to the nearest dollar.

**1.** Assuming a discount rate of 16%, compute the
net present value of each piece of equipment.

Puro equipment: | $ |

Briggs equipment: | $ |

**2.** A third option has surfaced for equipment
purchased from an out-of-state supplier. The cost is also $560,000,
but this equipment will produce even cash flows over its 5-year
life. What must the annual cash flow be for this equipment to be
selected over the other two? Assume a 16% discount rate.

$ per year

Answer #1

Net Present Value Use Exhibit 12B.1 and Exhibit 12B.2 to locate
the present value of an annuity of $1, which is the amount to be
multiplied times the future annual cash flow amount. Each of the
following scenarios is independent. Assume that all cash flows are
after-tax cash flows.
Campbell Manufacturing is considering the purchase of a new
welding system. The cash benefits will be $480,000 per year. The
system costs $1,850,000 and will last 10 years.
Evee Cardenas is...

Use Exhibit 12B.1 and Exhibit 12B.2 to locate the present value
of an annuity of $1, which is the amount to be multiplied times the
future annual cash flow amount. Each of the following scenarios is
independent. Assume that all cash flows are after-tax cash flows.
Campbell Manufacturing is considering the purchase of a new welding
system. The cash benefits will be $480,000 per year. The system
costs $2,050,000 and will last 10 years. Evee Cardenas is
interested in investing...

Exercise 12-14 Comparison of Projects Using Net Present Value
[LO12-2]
Labeau Products, Ltd., of Perth, Australia, has $19,000 to
invest. The company is trying to decide between two alternative
uses for the funds as follows:
Invest in
Project X
Invest in
Project Y
Investment required
$
19,000
$
19,000
Annual cash inflows
$
6,000
Single cash inflow at the end of 6 years
$
40,000
Life of the project
6 years
6 years
The company’s discount rate is 14%.
Click...

Exercise 13-14 Comparison of Projects Using Net Present Value
[LO13-2]
Labeau Products, Ltd., of Perth, Australia, has $21,000 to
invest. The company is trying to decide between two alternative
uses for the funds as follows:
Invest in
Project X
Invest in
Project Y
Investment required
$
21,000
$
21,000
Annual cash inflows
$
6,000
Single cash inflow at the end of 6 years
$
40,000
Life of the project
6 years
6 years
The company’s discount rate is 15%.
Click...

Exercise 13-14 Comparison of Projects Using Net Present Value
[LO13-2]
Labeau Products, Ltd., of Perth, Australia, has $35,000 to
invest. The company is trying to decide between two alternative
uses for the funds as follows:
Invest in
Project X
Invest in
Project Y
Investment
required
$
35,000
$
35,000
Annual cash
inflows
$
12,000
Single cash inflow
at the end of 6 years
$
90,000
Life of the
project
6
years
6
years
The company’s discount...

Oxford Company has limited funds available for investment and
must ration the funds among four competing projects. Selected
information on the four projects follows:
Project
Investment
Required
Net
Present
Value
Life of
the
Project
(years)
Internal
Rate
of Return
A
$
890,000
$
459,687
8
23
%
B
$
690,000
$
227,448
13
16
%
C
$
590,000
$
279,681
8
22
%
D
$
790,000
$
159,067
4
19
%
The net present values above have been computed using...

Net present value—unequal lives
Bunker Hill Mining Company has two competing proposals: a
processing mill and an electric shovel. Both pieces of equipment
have an initial investment of $710,000. The net cash flows
estimated for the two proposals are as follows:
Net Cash Flow
Year
Processing
Mill
Electric
Shovel
1
$311,000
$345,000
2
257,000
315,000
3
257,000
322,000
4
262,000
323,000
5
182,000
6
144,000
7
139,000
8
139,000
The estimated residual value of the processing mill at the end...

Problem 13-18 Net Present Value Analysis [LO13-2]
Oakmont Company has an opportunity to manufacture and sell a new
product for a four-year period. The company’s discount rate is 17%.
After careful study, Oakmont estimated the following costs and
revenues for the new product:
Cost of equipment needed
$
165,000
Working capital needed
$
67,000
Overhaul of the equipment in year two
$
10,000
Salvage value of the equipment in four years
$
13,000
Annual revenues and costs:
Sales revenues
$...

Problem 13-18 Net Present Value Analysis [LO13-2]
Oakmont Company has an opportunity to manufacture and sell a new
product for a four-year period. The company’s discount rate is 17%.
After careful study, Oakmont estimated the following costs and
revenues for the new product:
Cost of equipment needed
$
165,000
Working capital needed
$
67,000
Overhaul of the equipment in year two
$
10,000
Salvage value of the equipment in four years
$
13,000
Annual revenues and costs:
Sales revenues
$...

The management of Kunkel Company is considering the purchase of
a $29,000 machine that would reduce operating costs by $6,500 per
year. At the end of the machine’s five-year useful life, it will
have zero salvage value. The company’s required rate of return is
16%.
Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine
the appropriate discount factor(s) using table.
Required:
1. Determine the net present value of the investment in the
machine.
2. What is the difference...

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