Diemia Hospital has been considering the purchase of a new x-ray machine. The ex

Question

Diemia Hospital has been considering the purchase of a new x-ray machine. The existing machine is operable for five more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $80,000. The new machine will cost $600,000 and an additional cash investment in working capital of $25,000 will be required. The new machine will reduce the average amount of time required to take the x-rays and will allow an additional amount of business to be done at the hospital. The investment is expected to net $50,000 in additional cash inflows during the year of acquisition and $200,000 each additional year of use. The new machine has a five-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life.

What is the net present value of the investment, assuming the required rate of return is 11%? Would the hospital want to purchase the new machine?

A) $(59,050); no

B) $55,430 no

C) $59,050; yes

D) $55,430; yes

Explanation / Answer

THe new x ray machine should be purchased as this leads to positive NPV of $ 59,050

New X Ray Machine Year' Cash flows    PVF @ 11%    PV 0 -545000 1 -545000 1 50000 0.901 45050 2 200000 0.812 162400 3 200000 0.731 146200 4 200000 0.659 131800 5 200000 0.593 118600 NPV 59050

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