Reference no: EM132008643

Problem - 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

2 280,000 120,000

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.

Required:

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.