Net Present Value and Competing Projects

For discount factors use Exhibit 14B-1 and Exhibit 14B-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 12%, 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 12% discount rate. $ per year