NET PRESENT VALUE AND COMPETING PROJECTS

General 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                X-Ray Equipment                MRI Equipment

1                      $300,000                               $ 50,000

2                      250,000                                     50,000

3                      200,000                                  300,000

4                      100,000                                  400,000

5                      50,000                                    450,000

Both projects require an initial investment of $500,000. In both cases, assume that the equipment has a life of five years with no salvage value

Required:

1. Assuming a discount rate of 12 percent, compute the net present value of each piece of equipment.

2. A third option has surfaced for equipment purchased from an out-of-province supplier. The cost is also $500,000, but this equipment will produce even cash flows over its five-year life. What must the annual cash flow be for this equipment to be selected over the other two? Assume a 12 percent discount rate.