Question

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 $320,000 $120,000 280,000 120,000 240,000 320,000 160,000 400,000 120,000 440,000 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 10%, compute the net present value of each piece of equipment. Puro equipment: X $ 326,422 $435,096 Briggs equipment: 2. A third option has surfaced for equipment purchased from an out-of-state supplier. The cost is also $560,000, but this equipment will produce even cash flows over its 5-year life. What must the annual cash flow be for this equipment to be selected over the other two? Assume a 10% discount rate. $ 262,504 X per year Feedback Check My Work Incorrect

Answer 1

Solution 1:

Computation of NPV - Spiro Hospital
			Puro Equipment		Briggs Equipment
Particulars	Period	PV Factor (9%)	Amount	Present Value	Amount	Present Value
Cash outflows:
Cost of equipment	0	1	$5,60,000	$5,60,000	$5,60,000	$5,60,000
Present Value of Cash outflows (A)				$5,60,000		$5,60,000
Cash Inflows
Annual after tax Cash Inflows:
Year 1	1	0.909	$3,20,000	$2,90,880	$1,20,000	$1,09,080
Year 2	2	0.826	$2,80,000	$2,31,280	$1,20,000	$99,120
Year 3	3	0.751	$2,40,000	$1,80,240	$3,20,000	$2,40,320
Year 4	4	0.683	$1,60,000	$1,09,280	$4,00,000	$2,73,200
Year 5	5	0.621	$1,20,000	$74,520	$4,40,000	$2,73,240
Present Value of Cash Inflows (B)				$8,86,200		$9,94,960
Net Present Value (NPV) (B-A)				$3,26,200		$4,34,960

Solution 2:

Annual cash flows = ($560000+ 434960) / Cumulative PV factor @10% for 5 periods

= $994960/ 3.790

= $262,522