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

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: $

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.
$ per year

Solutions

Expert Solution

Part 1: Net Present Value

Net Present Value = Discounted cash Inflow - Discounted cash Outflow

Puro Equipment

Year

Cash Flow

$

PVF @ 16%

Discounted cash flow

$

1 320,000 0.86207 275,862
2 280,000 0.74316 208,085
3 240,000 0.64066 153,758
4 160,000 0.55229 88,366
5 120,000 0.47611 57,133
0 (560,000) 1 (560,000)
Net Present Value 223,204

Briggs Equipment

Year

Cash Flow

$

PVF @ 16%

Discounted cash flow

$

1 120,000 0.86207 103,448
2 120,000 0.74316 89,179
3 320,000 0.64066 205,011
4 400,000 0.55229 220,916
5 440,000 0.47611 209,488
0 (560,000) 1 (560,000)
Net Present Value 268,042


Part 2: Annual cash flow

NPV = Present value of annual cash inflows - Initial Investment

Investment = $560,000

Cumulative present value factor for 5 Years @ 16% = 3.27429

$268,044 = Annual cash inflow * PVF of an annuity (16%,5) - $560,000

Cash Inflow * 3.27429 = $828,044

Annual Cash flow = $828,044 / 3.27429 = $252,893

Note:

1. Briggs equipment is selected for calculating third option equipment,s annual cash flow. Because, its NPV is more than the Puro equipment's NPV.

2. NPV of new option should be at least more than NPV of Briggs equipment. So, new option is taken as $268,044.

All the best...


Related 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 Required: Round present value calculations and your final...
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 For discount factors use Exhibit 12B-1 and Exhibit 12B-2. Talmage Inc. has just...
Net Present Value For discount factors use Exhibit 12B-1 and Exhibit 12B-2. Talmage Inc. has just completed development of a new printer. The new product is expected to produce annual revenues of $2,700,000. Producing the printer requires an investment in new equipment costing $2,880,000. The printer has a projected life cycle of 5 years. After 5 years, the equipment can be sold for $360,000. Working capital is also expected to decrease by $360,000, which Talmage will recover by the end...
Net Present Value Use Exhibit 12B.1 and Exhibit 12B.2 to locate the present value of an...
Net Present Value Use Exhibit 12B.1 and Exhibit 12B.2 to locate the present value of an annuity of $1, which is the amount to be multiplied times the future annual cash flow amount. Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $1,450,000 and will last 10 years. Evee Cardenas is...
Net Present Value Use Exhibit 12B.1 and Exhibit 12B.2 to locate the present value of an...
Net Present Value Use Exhibit 12B.1 and Exhibit 12B.2 to locate the present value of an annuity of $1, which is the amount to be multiplied times the future annual cash flow amount. Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $2,750,000 and will last 10 years. Evee Cardenas is...
Net Present Value Use Exhibit 12B.1 and Exhibit 12B.2 to locate the present value of an...
Net Present Value Use Exhibit 12B.1 and Exhibit 12B.2 to locate the present value of an annuity of $1, which is the amount to be multiplied times the future annual cash flow amount. Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $2,150,000 and will last 10 years. Evee Cardenas is...
Net Present Value Use Exhibit 12B.1 and Exhibit 12B.2 to locate the present value of an...
Net Present Value Use Exhibit 12B.1 and Exhibit 12B.2 to locate the present value of an annuity of $1, which is the amount to be multiplied times the future annual cash flow amount. Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $2,950,000 and will last 10 years. Evee Cardenas is...
Net Present Value Use Exhibit 12B.1 and Exhibit 12B.2 to locate the present value of an...
Net Present Value Use Exhibit 12B.1 and Exhibit 12B.2 to locate the present value of an annuity of $1, which is the amount to be multiplied times the future annual cash flow amount. Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $2,850,000 and will last 10 years. Evee Cardenas is...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT