Net Present Value and Competing Projects Follow the format shown in Exhibit 14B-1 and Exhibit 14B-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 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 12%, compute the net present value of each piece of equipment. Puro equipment: $ 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 12% discount rate.