Textbook Problem

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NPV

A clinic is considering the possibility of two new purchases: new MRI equipment and new biopsy equipment. Each project requires an investment of $425,000. The expected life for each is five years with no expected salvage value. The net cash inflows associated with the two independent projects are as follows:

Required:

Compute the net present value of each project, assuming a required rate of 12 percent.

To determine

Calculate the net present value of each project of a clinic.

Explanation of Solution

Net present value method (NVP): Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

Calculate the net present value of each project of a clinic as follows:

MRI Equipment:

Year	Cash inflow	Present value factor @12%	Present value
1	$ 200,000	0.893	$ 178,600
2	$ 100,000	0.797	$ 79,700
3	$ 150,000	0.712	$ 106,800
4	$ 100,000	0.636	$ 63,600
5	$ 50,000	0...