Exercise $14-30$ Net Present Value and Competing Projects

Wilburton 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. Aftertax

cash inflows for the two competing projects are as follows:

Year Puro Equipment Briggs Equipment

$1$ $$400,000$ $$150,000$

$2350,000150,000$

$3300,000400,000$

$4200,000500,000$

$5150,000550,000$

Both projects require an initial investment of $$700,000.$ In both cases, assume that the equipment

has a life of five years with no salvage value.

Required:

$1.$ Assuming a discount rate of $12$ percent, compute the net present value of each piece of

equipment.

$2.$ A third option has surfaced for equipment purchased from an out$-$of$-$state supplier. The cost

is also $$700,000,$ but this equipment will produce even cash flows over its five$-$year life. What

must the annual cash flow be for this equipment to be selected over the other two? Assume a

$12$ percent discount rate.