Question

A pharmacy has purchased a small equipment for delivery of prescriptions. The cost of the equipment is $50,000 with a useful life of 6 years and salvage value of $1,500. Overhaul of the equipment in the 5th year is required which will cost about $5,000 This new equipment should increase revenues by at least $100,000 and reduce labor cost by $20,000 per year. The cost of these prescriptions will be about $50,000. Other annual out-of-pocket operating costs are $15,000 per year. With a discount factor of 18%, what is the NPV of this project?

​​​​​​​PLEASE SHOW WORK

Answer 1

Solution:

Annual cash inflows = Increase in revenue + Reduction in labor costs - Cost of prescriptions - Other operating costs

= $100,000 + $20,000 - $50,000 - $15,000 = $55,000

Computation of NPV
Particulars	Amount	Period	PV Factor	Present Value
Cash Outflows:
Cost of equipment	$50,000	0	1	$50,000
Overhaul cost	$5,000	5	0.43711	$2,186
Present Value of Cash Outflows (A)				$52,186
Cash Inflows:
Annual cash inflows	$55,000	1-6	3.4976	$192,368
Salvage Value	$1,500	6	0.37043	$556
Present Value of Cash Inflows (B)				$192,924
Net Present Value (B-A)				$140,738