Answer:
1. Assuming a discount rate of 14%, compute the net present value of each piece of equipment.
- Puro equipment: $255,203
- Briggs equipment: $318,944
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
Explanation:
Year Puro Equipment Briggs Equipment
0 -$560,000 -$560,000
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
I used an excel spreadsheet to calculate the NPVs
the PV of the third equipment's annual cash flow should be higher than $878,944 (PV of Brigg's cash flows = $560,000 + $318,944)
now I used a annuity table: annuity factor for 5 years and 14% is 3.4331
cash flow x 3.4331 ≥ $878,944
cash flow ≥ $878,944 / 3.4331 = $256,021
