Present value of $1

Periods

4%

6%

8%

10%

12%

14%

1

0.962

0.943

0.926

0.909

0.893

0.877

2

0.925

0.890

0.857

0.826

0.797

0.769

3

0.889

0.840

0.794

0.751

0.712

0.675

4

0.855

0.792

0.735

0.683

0.636

0.592

5

0.822

0.747

0.681

0.621

0.567

0.519

6

0.790

0.705

0.630

0.564

0.507

0.456

7

0.760

0.665

0.583

0.513

0.452

0.400

8

0.731

0.627

0.540

0.467

0.404

0.351

9

0.703

0.592

0.500

0.424

0.361

0.308

10

0.676

0.558

0.463

0.386

0.322

0.270

Present value of an Annuity of $1

Periods

4%

6%

8%

10%

12%

14%

1

0.962

0.943

0.926

0.909

0.893

0.877

2

1.886

1.833

1.783

1.736

1.690

1.647

3

2.775

2.673

2.577

2.487

2.402

2.322

4

3.630

3.465

3.312

3.170

3.037

2.914

5

4.452

4.212

3.993

3.791

3.605

3.433

6

5.242

4.917

4.623

4.355

4.111

3.889

7

6.002

5.582

5.206

4.868

4.564

4.288

8

6.733

6.210

5.747

5.335

4.968

4.639

9

7.435

6.802

6.247

5.759

5.328

4.946

10

8.111

7.360

6.710

6.145

5.650

5.216

Ray Corporation is looking to invest in a new piece of equipment. Two manufacturers of this type of equipment are being considered. After-tax inflows for the two competing projects are:

Year

Fallon Equipment Inc.

Toller Equipment Inc.

1

$275,000

$70,000

2

225,000

70,000

3

185,000

285,000

4

140,000

330,000

5

65,000

390,000

Both projects require an initial investment of $400,000. In both cases, assume that the equipment has a life of 5 years with no salvage value.

Required:

A. Assuming a discount rate of 8%, compute the net present value of each piece of equipment.

B. A third option is now available for a supplier outside of the country. The cost is also $400,000, but it 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 an 8% discount rate.