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Net Present Value and Competing Projects For discount factors use Exhibit 123.1 and Exhibit 120.2. Spiro Hospital is investig
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Spiro Hospital

  1. Assuming a discount rate of 9%, computation of the net present value of each piece of equipment:

Puro Equipment

$345,904

Briggs Equipment

$467,512

Computations:

Puro Equipment

Year

Cash Flow

Discount Factor at 9% (P/F)

Present Value

0

($560,000)

1

($560,000)

1

$320,000

0.9174

$293,568

2

$280,000

0.8417

$235,676

3

$240,000

0.7722

$185,328

4

$160,000

0.7084

$113,344

5

$120,000

0.6499

$77,988

NPV

$345,904

Briggs Equipment

Year

Cash Flows

Discount Factor at 9% (P/F)

Present Value

0

($560,000)

1

($560,000)

1

$120,000

0.9174

$110,088

2

$120,000

0.8417

$101,004

3

$320,000

0.7722

$247,104

4

$400,000

0.7084

$283,360

5

$440,000

0.6499

$285,956

NPV

$467,512

  1. Computation of desired annual cash flow for the equipment to be selected over the other two, assuming a 9% discount rate:

Net present value = present value of cash inflows – present value of cash outflows

NPV = [total annual cash inflows for 5 years x (3.89)] – ($560,000 x 1.000)

Since, Briggs equipment has higher NPV, the annual cash inflows for new equipment must exceed the NPV of Briggs equipment to get selected.

Considering the NPV of Briggs equipment,

$467,512 = Cash flows x 3.89 - $560,000

Cash flows x 3.89 = $1,027,512

Cash flows = $1,027,512/3.89= $264,142

Desired annual cash flows must be higher than $264,142.

Hence, the annual cash flow for the third equipment must be higher than $264,142 to get selected over the other two.

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