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.

Answer 1

Solution: Calculation of Net Present Value of Puro Equipment

Year	After Tax Cash Inflows $	Present Value factor @16%	Present Value of After Tax Cash Inflows $
1	3,20,000.00	0.862069	2,75,862.07
2	2,80,000.00	0.743163	2,08,085.61
3	2,40,000.00	0.640658	1,53,757.84
4	1,60,000.00	0.552291	88,366.58
5	1,20,000.00	0.476113	57,133.56
		Total Present Value of After Tax Cash Inflows	7,83,205.66

Net Present Value = Total Present Value of After Tax Cash Inflows – Initial Investment

                  

                               = $783,205.66 – $560,000 = $223,205.66

Therefore, Net Present Value of Puro Equipment is $223,205.66

Calculation of Net Present Value of Briggs Equipment

Year	After Tax Cash Inflows $	Present Value factor @16%	Present Value of After Tax Cash Inflows $
1	1,20,000.00	0.862069	1,03,448.28
2	1,20,000.00	0.743163	89,179.55
3	3,20,000.00	0.640658	2,05,010.46
4	4,00,000.00	0.552291	2,20,916.44
5	4,40,000.00	0.476113	2,09,489.73
		Total Present Value of After Tax Cash Inflows	8,28,044.45

Net Present Value = Total Present Value of After Tax Cash Inflows – Initial Investment

                                 = $828,044.45 – $560,000 = $268,044.45

Therefore, Net Present Value of Briggs Equipment is $268,044.45

As the Net Present Value of Briggs Equipment is higher than Puro Equipment, Spiro Hospital should invest in Briggs Equipment.