A dental practice is considering the purchase of two new pieces of equipment: new operatory equipment and new X-ray equipment. Each purchase will necessitate an initial investment of $950,000. Both proposed pieces of equipment have an expected life of five years, no projected salvage value and provide net cash flows as follows:

 

Complete the following:
1. Compute the Net Present Value (NPV) of each proposal, assuming a required rate of return of 10 percent. Explain.
2. Compute the Internal Rate of Return (IRR) for each proposal. Explain.
3. Compute the Payback Period (undiscounted) of each proposal. Explain.
4. Using your answers from #1 - #3, make a recommendation as to whether you would recommend investing in the new operatory equipment, the new X-ray equipment, both or neither. Include both quantitative (numerical) and qualitative (non-numerical) reasons for your recommendation. EXPLAIN
5. Assuming that the dental practice is required to pay income taxes at a rate of 25%, recompute the NPV of each project. Explain

Transcribed Image Text:

Year 12 3 45 Operatory. $400,000 $200,000 $300.000 $200,000 $100,000 X-ray. $100,000 $100,000 $200,000 $400,000 $475,000 Year 12 3 45 Operatory. $400,000 $200,000 $300.000 $200,000 $100,000 X-ray. $100,000 $100,000 $200,000 $400,000 $475,000

Answer rating: 100% (QA)

1 Net Present Value NPV Calculation The formula for calculating NPV is NPV CFt 1 rt where CFt is the cash flow at time t r is the required rate of ret... View the full answer