Perry Hospital is investigating the possibility of investing in new dialysis equipment. Two local manufacturers of this

Question:

Perry 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:

Both projects require an initial investment of $500,000. 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 $500,000, 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 discountrate.

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...