Question

You have an opportunity to buy a new piece of diagnostic equipment for the following terms: price including installation: $1,285,000; expected useful life: 5 years with straight-line depreciation; cost of capital for the practice is 12%.According to financial projections, each year will look something like this:

Projections ($000s)

Start	1	2	3	4	5	6	Total
Cash inflows		328	450	525	760	620	2,683
Cash outflows	1,285	105	138	155	200	170	2,053
Net cash flows	-1,285	223	312	370	560	450	630

What is the NPV of this decision?

Answer 1

Net Present Value [NPV] of this decision = $ 37,422

Net Present Value [NPV] = Present value of annual net cash inflows – Initial Investment cost

Present value of annual net cash inflows

Year	Annual Net Cash inflows	Present Value Factor at 12%	Present Value of net cash inflows
1	223,000	0.892857143	199,107
2	312,000	0.797193878	248,724
3	370,000	0.711780248	263,359
4	560,000	0.635518078	355,890
5	450,000	0.567426856	255,342
TOTAL PRESENT VALUE			$ 1,322,422

Initial Investment costs = $ 1,285,000

Net Present Value [NPV] = Present value of annual net cash inflows – Initial Investment cost

= $ 1,322,422 - $ 1,285,000

= $ 37,422