Question
In: Accounting
Net Present Value and Competing Projects For discount factors use Exhibit 12B.1 and Exhibit 12B.2. Spiro...
Net Present Value and Competing Projects
For discount factors use Exhibit 12B.1 and Exhibit 12B.2.
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 |
Required:
Round present value calculations and your final answers to the nearest dollar.
1. Assuming a discount rate of 16%, 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 16% discount rate.
$ 252,892 per year
Solutions
Expert Solution
Solution 1:
| Computation of NPV | ||||||
| Puro Equipment | Briggs Equipment | |||||
| Particulars | Period | PV Factor (16%) | Amount | Present Value | Amount | Present Value |
| Cash outflows: | ||||||
| Cost of Equipment | 0 | 1 | $560,000 | $560,000 | $560,000 | $560,000 |
| Present Value of Cash outflows (A) | $560,000 | $560,000 | ||||
| Cash Inflows | ||||||
| Year 1 | 1 | 0.86207 | $320,000 | $275,862 | $120,000 | $103,448 |
| Year 2 | 2 | 0.74316 | $280,000 | $208,086 | $120,000 | $89,180 |
| Year 3 | 3 | 0.64066 | $240,000 | $153,758 | $320,000 | $205,010 |
| Year 4 | 4 | 0.55229 | $160,000 | $88,367 | $400,000 | $220,916 |
| Year 5 | 5 | 0.47611 | $120,000 | $57,134 | $440,000 | $209,490 |
| Present Value of Cash Inflows (B) | $783,206 | $828,044 | ||||
| Net Present Value (NPV) (B-A) | $223,206 | $268,044 | ||||
Solution 2:
If surface for equipment has to be selected over the two, the it must provide present value of cash inflows equal to $828,044 so that it will have higher NPV.
Let annual cash inflow from this equipment is X
Now
X * Cumulative PV Factor at 16% for 5 periods = $828,044
X * 3.27429 = $828,044
X = $252,892
Therefore required annual cash flow from this equipment = $252,892
ekkarill92 answered 2 years agoRelated Solutions
Net Present Value and Competing Projects For discount factors use Exhibit 12B.1 and Exhibit 12B.2. Spiro...
Net Present Value and Competing Projects
For discount factors use Exhibit 12B.1 and Exhibit 12B.2.
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....
Net Present Value and Competing Projects For discount factors use Exhibit 12B.1 and Exhibit 12B.2. Spiro...
Net Present Value and Competing Projects For discount factors
use Exhibit 12B.1 and Exhibit 12B.2. 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....
Net Present Value and Competing Projects For discount factors use Exhibit 12B.1 and Exhibit 12B.2. Spiro...
Net Present Value and Competing Projects
For discount factors use Exhibit 12B.1 and Exhibit 12B.2.
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....
Net Present Value and Competing Projects For discount factors use Exhibit 12B.1 and Exhibit 12B.2. Spiro...
Net Present Value and Competing Projects
For discount factors use Exhibit 12B.1 and Exhibit 12B.2.
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....
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