Exercise 14-30 Net Present Value and Competing Projects

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:

OBJECTIVE 1 6

OBJECTIVE 1 2 3 4

OBJECTIVE 1 2 3 4

Year

1 2 3 4 5

Puro Equipment

$320,000 280,000 240,000 160,000 120,000

Briggs Equipment

$120,000 120,000 320,000 400,000 440,000

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:

1. Assuming a discount rate of 12%, 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 $560,000, but this