Question

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.

Answer 1

Answer:

NPV for puro = $289,529.95

NPV for briggs = $374,450.85

Explanation:

Net present value is the present value of after tax cash flows from an investment less the amount invested.  

net present value can be calcuated using a financal calcuatopr

Puro Equipment

cash flow in year 0 = $-560,000

cash flow in year 1= $320,000

cash flow in year 2 = $280,000

cash flow in year 3 = $240,000

cash flow in year 4 = 160,000

cash flow in year 5 = 120,000

I = 12%

NPV = $289,529.95

Briggs Equipment

cash flow in year 0 = $-560,000

cash flow in year 1= $120,000

cash flow in year 2= $120,000

cash flow in year 3= $320,000

cash flow in year 4= 400,000

cash flow in year 5= 440,000

I = 12%

NPV = $374,450.85

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute  

Answer 2

The computation of the net present values of the two equipment are as follows:

                                        Puro Equipment    Briggs Equipment

Initial investment                    ($560,000)          ($560,000)

Present value of cash inflows $849,600            $934,520

Net present value                  $289,600            $374,520

Data and Calculations:

Estimated useful life = 5 years

Discount factor = 12%

Initial cash outlay in each equipment = $560,000

Year                     Puro Equipment

         Cash Flows        PV Factor    Present Value

0      ($560,000)                       1           ($560,000)  

1        $320,000                 0.893             285,760

2         280,000                 0.797              223,160

3         240,000                 0.712               170,880

4         160,000                  0.636              101,760

5         120,000                  0.567              68,040

Total present value of cash inflows    $849,600

Net present value =                            $289,600

Year             Briggs Equipment

         Cash Flows          PV Factor    Present Value

0      ($560,000)                       1           ($560,000)  

1         $120,000                  0.893              107,160

2          120,000                  0.797              95,640

3         320,000                  0.712             227,840

4        400,000                   0.636           254,400

5        440,000                   0.567           249,480

Total present value of cash inflows    $934,520

Net present value =                            $374,520

Thus, the net present value of Puro Equipment is $289,600 while that of Briggs Equipment is $374,520.

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