Mountain View Hospital has purchased new lab equipment for $182,622. The equipme
ID: 2452590 • Letter: M
Question
Mountain View Hospital has purchased new lab equipment for $182,622. The equipment is expected to last for three years and to provide cash inflows as follows: (Ignore income taxes.)
Year 1
$
56,000
Year 2
$
74,000
Year 3
?
View Exhibit 8B-1 and Exhibit 8B-2 to determine the appropriate discount factor(s) using table.
Required:
Assuming that the equipment will yield exactly a 10% rate of return, what is the expected cash inflow for Year 3? (Round discount factor(s) to 3 decimal places.)
Cash Inflow
Choose Numerator:
/
Choose Denominator:
=
Cash Inflow
Present value of Year 3 cash inflow
/
Present value factor
=
Cash Inflow
/
=
5
Wriston Company has $300,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are as follows:
A
B
Cost of equipment required
$300,000
$0
Working capital investment required
$0
$300,000
Annual cash inflows
$56,000
$48,000
Salvage value of equipment in nine years
$14,000
$0
Life of the project
9 years
9 years
The working capital needed for project B will be released for investment elsewhere at the end of nine years. Wriston Company uses a 10% discount rate. (Ignore income taxes.)
View Exhibit 8B-1 and Exhibit 8B-2 to determine the appropriate discount factor(s) using table.
Required:
a.
Calculate net present value for each project. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.)
Item
Year(s)
Amount of Cash Flows
10% Factor
Present Value of Cash Flows
Project A:
Cost of the equipment
Now
)
Annual cash inflows
1-9
Salvage value of the equipment
9
Net present value
Project B:
Working capital investment
Now
Annual cash inflows
1-9
Working capital released
9
Net present value
b.
Which investment alternative (if either) would you recommend that the company accept? Circle or highlight your answer.
Project A
Project B
Mountain View Hospital has purchased new lab equipment for $182,622. The equipment is expected to last for three years and to provide cash inflows as follows: (Ignore income taxes.)
Explanation / Answer
SOLUTION :
year
cash inflow
DF @10%
1
56000
0.909
50,909
2
74000
0.826
61,157
3
93,910
0.751
70,556
(182622 -50909-61157)
(70556/.751)
182622
NPV = PV OF OUTFLOW + INFLOW
0= -182622 + 50909 + 61157 + 0.751X
X = 93910
a.CALCULATION OF NPV
Item
Year(s)
Amount of Cash Flows
10% Factor
Present Value of Cash Flows
Project A:
Cost of the equipment
Now
-300000
1
-300000
Annual cash inflows
1-9.
56000
5.759
322504
Salvage value of the equipment
9
14000
0.424
5936
Net present value
28440
Project B:
Working capital investment
Now
-300000
1
-300000
Annual cash inflows
1-9.
48000
5.759
276432
Working capital released
9
300000
0.424
127200
Net present value
103632
b.. Project B Should be accepted as it has higher NPV
year
cash inflow
DF @10%
1
56000
0.909
50,909
2
74000
0.826
61,157
3
93,910
0.751
70,556
(182622 -50909-61157)
(70556/.751)
182622
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