Humana Hospital Corporation installed a new MRI machine at a cost of $750,000 th

Question

Humana Hospital Corporation installed a new MRI machine at a cost of $750,000 this year in its medical professional clinic in Cedar Park. This state-of the-art system is expected to be used for 5 years and then sold for $75,000. Humana uses a return requirement of 24% per year for all of its medical diagnostic equipment. As a bioengineering student currently serving a coop semester on the management staff of Humana Corporation in Louisville, Kentucky, you are asked to determine the minimum revenue required each year to realize the expected recovery and return. Also, you are asked to draw two cash ow diagrams, one showing the MRI purchase and sale cash ow and a second depicting the required capital recovery each year

Explanation / Answer

ANSWER:

FOR FINDING THE REVENUE THE PRESENT VALUE WILL HAVE TO BE ZERO AT 24%.

PV = -750,000 + REVENUE(P/A,24%,5) + 75,000(P/F,24%,5) = 0

750,000 = REVENUE(P/A,24%,5) + 75,000(P/F,24%,5)

REVENUE = $263,867.208 = $263,867.21 ( APPROX)

CASH FLOW DIAGRAMS CANNOT BE DRAWN IN EXCEL AS I HAVE MADE THE CASH FLOWS ABOVE AND PLEASE USE IT TO MAKE THE CASH FLOW DIAGRAM.

THESE ARE YOUR CASH FLOW DIAGRAM BUT YOU NEED TO DIVIDE IT INTO 2 PARTS AS MRI PURCHASE WHICH IS YOUR INVESTMENT AND SALE CASH FLOW WHICH IS YOUR AMOUNT REQUIRED EVERY YEAR WHICH I HAVE DENOTED WITH R.

IN THE SECOND CASH FLOW DIAGRAM DEPICT THE CAPITAL RECOVERY.

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