Question

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. 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 16%, compute the net present value of each piece of equipment.

Puro equipment:	$
Briggs equipment:	$

Answer 1

Answer)

Calculation of Net Present Value

Net Present Value = Present value of cash inflows – Present value of cash outflows

Puro Equipment:

Net Present Value = $ 783,205 - $ 560,000

                                  = $ 223,205

   

Briggs Equipment:

Net Present Value = $ 828,043 - $ 560,000

                                  = $ 268,043

Working Note:

Calculation of Present value of cash inflows (Puro Equipment):

Year	Cash Inflows	Present Value factor at 16%	Present value
1	$320,000	0.86207	$275,862.40
2	$280,000	0.74316	$208,084.80
3	$240,000	0.64066	$153,758.40
4	$160,000	0.55229	$88,366.40
5	$120,000	0.47611	$57,133.20
Total	$783,205.20

Present value of cash inflow of Puro Equipment is $ 783,205 (approx.)

Calculation of Present value of cash inflows (Briggs Equipment):

Year	Cash Inflows	Present Value factor at 16%	Present value
1	$120,000	0.86207	$103,448.40
2	$120,000	0.74316	$89,179.20
3	$320,000	0.64066	$205,011.20
4	$400,000	0.55229	$220,916.00
5	$440,000	0.47611	$209,488.40
Total	$828,043.20

Present value of cash inflow of Briggs Equipment is $ 828,043 (approx.)