Exercise 14. Four Questions – Multi-part


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Exercise 14. Four Questions – Multi-part Exercise 14.docx Exercise 14­30 Net Present Value and Competing Projects Follow the format shown in Exhibit 14B­1 and Exhibit 14B­2 as you complete the requirements below. 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. After­tax cash inflows for the two competing projects are as follows: 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 12%, compute the net present value of each piece of equipment. Puro equipment: $ Briggs equipment: $ 2. A third option has surfaced for equipment purchased from an out­of­state supplier. The cost is also $560,000, but this equipment will produce even cash flows over its 5­year life. What must the annual cash flow be for this equipment to be selected over the other two? Assume a 12% discount rate. $ per year Problem 14­40 Review of Basic Capital Budgeting Procedures For discount factors use Exhibit 14B­1 and Exhibit 14B­2. Dr. Whitley Avard, a plastic surgeon, had just returned from a conference in which she learned of a new surgical procedure for removing wrinkles around eyes, reducing the time to perform the normal procedure by 50%. Given her patient­load pressures, Dr. Avard is excited to try out the new technique. By decreasing the time spent on eye treatments or procedures, she can increase her total revenues by performing more services within a work period. In order to implement the new procedure, special equipment costing $74,000 is needed. The equipment has an expected life of 4 years, with a salvage value of $6,000. Dr. Avard estimates that her cash revenues will increase by the following amounts: She also expects additional cash expenses amounting to $3,000 per year. The cost of capital is 12%. Assume that there are no income taxes. Required: 1. Compute the payback period for the new equipment. Round your answer to two decimal places. years 2. Compute the ARR. Round your answer to two decimal places. % 3. Conceptual Connection: Compute the NPV and IRR for the project. Use 14% as your first guess for IRR. Round present value calculations and your final NPV answer to the nearest dollar. Use the minus sign to indicate a negative NPV. Enter IRR as a percent, rounded to the nearest percent. NPV $ IRR % Should Dr. Avard purchase the new equipment? Should she be concerned about payback or the ARR in making this decision? The input in the box below will not be graded, but may be reviewed and considered by your instructor. 4. Conceptual Connection: Before finalizing her decision, Dr. Avard decided to call two plastic surgeons who have been using the new procedure for the past six months. The conversations revealed a somewhat less glowing report than she received at the conference. The new procedure reduced the time required by about 25% rather than the advertised 50%. Dr. Avard estimated that the net operating cash flows of the procedure would be cut by one­third because of the extra time and cost involved (salvage value would be unaffected). Using this information, recompute the NPV of the project. Use the minus sign to indicate a negative NPV. Round present value calculations and your final NPV answer to the nearest dollar. $ What would you now recommend? Read more

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