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.