You have an opportunity to buy a new piece of diagnostic equipment for the follo

ID: 2617676 • Letter: Y

Question

You have an opportunity to buy a new piece of diagnostic equipment for the following terms: price including installation: $1,285,000; expected useful life: 5 years with straight-line depreciation; cost of capital for the practice is 12%.According to financial projections, each year will look something like this:

Projections ($000s)

What is the NPV of this decision?

Start 1 2 3 4 5 6 Total Cash inflows 328 450 525 760 620 2,683 Cash outflows 1,285 105 138 155 200 170 2,053 Net cash flows -1,285 223 312 370 560 450 630

Explanation / Answer

Net Present Value [NPV] of this decision = $ 37,422

Net Present Value [NPV] = Present value of annual net cash inflows – Initial Investment cost

Present value of annual net cash inflows

Year

Annual Net Cash inflows

Present Value Factor at 12%

Present Value of net cash inflows

223,000

0.892857143

199,107

312,000

0.797193878

248,724

370,000

0.711780248

263,359

560,000

0.635518078

355,890

450,000

0.567426856

255,342

TOTAL PRESENT VALUE

$ 1,322,422

Initial Investment costs = $ 1,285,000

Net Present Value [NPV] = Present value of annual net cash inflows – Initial Investment cost

= $ 1,322,422 - $ 1,285,000

= $ 37,422