each of the following scenarios is independent each of the following scenarios i

Question

each of the following scenarios is independent each of the following scenarios is independent each of the following scenarios is independent Net Present Value and Competing Projects Follow the format shown in Exhibit 128.1 and Exhibit 12B.2 as you complete the requirements below. 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 $320,000 280,000 240,000 160,000 20,000 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 calculations 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: { ) Check My Work Previous Next

Explanation / Answer

!. Puro Equipment NPV = $ 289,530

Briggs Equipment NPV = $ 3,74,453

Working

For Puro Equipment :

P.V. of $ 1 @12%

         2,89,530

For Briggs Equipment :

2. Answer : $ 259,226

Working :

Let 'x' be the annual cash inflows

For third option to get selected,

( x * P.V. of annuity factor of 12% for 5 years) - cost og equipment '>' or '=' $ 374,453

(x * 3.60478) - $ 560,000 '>' or '=' $ 374,453

   x '>' or '=' $ 934,453 / 3.60478

  x '>' or '=' $ 259,226

  

(1) (2) (3) = (1)*(2) Year

P.V. of $ 1 @12%

Inflows    P.V. of Inflows 1 0.89286          3,20,000          2,85,715 2 0.79719          2,80,000          2,23,213 3 0.71178          2,40,000          1,70,827 4 0.63552          1,60,000          1,01,683 5 0.56743          1,20,000 68,092 0 1        -5,60,000        -5,60,000 NPV

         2,89,530

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