Net Present Value and Competing Projects For discount factors use Exhibit 12B.1

Question

Net Present Value and Competing Projects For discount factors use Exhibit 12B.1 and Exhibit 12B.2. Spiro Hospital is investigating the posibility 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 $320,000 280,000 240,000 160,000 120,000 Briggs Equipment $120,000 120,000 320,000 400,000 440,000 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 caiculations and your final answers to the nearest dollar. 1. Assuming a discount rate of 12%, compute the net present value of each piece of equipment. Puro equipment Briggs equipment:

Explanation / Answer

Solution 1:

Solution 2:

Let annual cash flow of the equipment from out of state supplier = X

Now in order to select this equipment over other two equipments, this equipment should provide NPV of atleast $374,452.80

Therefore

X * cumulative PV Factor for 5 periods at 12% - $560,000 = $374,452.80

X * 3.60478 = $934,452.80

X = $259,226

Therefore required minimum cash inflows = $259,226.

Computation of NPV - Spiro Hospital Puro Equipment Briggs Equipment Particulars Period PV Factor Amount Present Value Amount Present Value Cash outflows: Cost of equipment 0 1 $560,000.00 $560,000.00 $560,000.00 $560,000.00 Present Value of Cash outflows (A) $560,000.00 $560,000.00 Cash Inflows Annual after tax Cash Inflows: Year 1 1 0.89286 $320,000.00 $285,715.20 $120,000.00 $107,143.20 Year 2 2 0.79719 $280,000.00 $223,213.20 $120,000.00 $95,662.80 Year 3 3 0.71178 $240,000.00 $170,827.20 $320,000.00 $227,769.60 Year 4 4 0.63552 $160,000.00 $101,683.20 $400,000.00 $254,208.00 Year 5 5 0.56743 $120,000.00 $68,091.60 $440,000.00 $249,669.20 Present Value of Cash Inflows (B) $849,530.40 $934,452.80 Net Present Value (NPV) (B-A) $289,530.40 $374,452.80

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