Question

A pharmacy has purchased a small equipment for delivery of prescriptions. The cost of the equipment...

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

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Homework Answers

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
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