Net Present Value and Competing Projects

For discount factors use Exhibit $12$B$\mathrm{.}1$ and Exhibit $12$B$\mathrm{.}2.$

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$

$2280,000120,000$

$3240,000320,000$

$4160,000400,000$

$5120,000440,000$

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 $14\%,$ compute the net present value of each piece of equipment.

Puro equipment: $fill in the blank $1$

Briggs equipment: $fill in the blank $2$

$2.$ 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 $14\%$ discount rate.

$fill in the blank $3$

per year