Question

Piccadilly Hospital has purchased new lab equipment for $200,000. The equipment is expected to last for three years and to provide cash inflows as follows:

Year 1	$60,000
Year 2	$70,000
Year 3	?

Required:

Assuming that the equipment will yield exactly a 10% rate of return, what is the expected cash inflow for year 3?

Answer 1

First, the present value of the required cash inflow in year 3 can be calculated at follows:

Investment in the equipment...................................................................$200,000

Less: present value of Year 1 and Year 2 cash inflows

                using the NPV formula in Microsoft Excel and

                a required rate of 10%........................................................................112,397

Present value of Year 3 cash inflow........................................................$ 87,603

 

Next, using the FVSCHEDULE formula in Microsoft Excel, the future value of $87,603 in three years can be calculated using a 10% required return. The result is $116,600.

This result can easily be checked by calculating the present value of the three cash inflows from the project of $60,000, $70,000 and $116,600 using the NPV function in Excel and a 10% required rate of return. The result is $200,000, which exactly equals the initial investment.

The expected cash inflow for year 3 is $116,600.