Question
Sprio Hospital is investigating the possibility of investing in a new dialysis equipment. Two local manufacturers of this equipment are being considered as sources of
Sprio Hospital is investigating the possibility of investing in a 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 $320,000
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.
1: Assuming a discount rate of 12%, 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 $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.
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