General 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 X-Ray Equipment MRI Equipment

1 $300,000 $ 50,000

2 250,000 50,000

3 200,000 300,000

4 100,000 400,000

5 50,000 450,000

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-province 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 discount rate.