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