The Radiology Department at St. Joseph\'s Hospital, a not-for-profit, is conside

Question

The Radiology Department at St. Joseph's Hospital, a not-for-profit, is considering purchasing a magnetic resonance imaging (MRI) machine. The cost to purchase and install an MRI is approximately $2,000,000. Assume St. Joseph's would like a minimum 8 percent return and that the economic life of the MRI is expected to be 10 years, with no salvage value. Assume that if the MRI is installed, the net cash flows are expected to increase by $300,000 per year. Use Exhibit 26-4 for present value factors a. Find the NPV of the MRI. b. Should the hospital acquire the MRI? c. What nonfinancial considerations might be important to the MRI investment decision?

Explanation / Answer

Solution-A: $13,024

Since, the Hospital will receive an additional cash inflow of $300,000 every year for whole economic life of Machine, it becomes important to calculate the present value of cash Inflow.

Cash Inflow per year (Year 1-10) = $300,000

Present value of an annuity $1 at 8% for 10 years = 6.710081

Present value of cash inflow of $300,000 to be received every year for 10 years

= $300,000 * 6.710081

= $2,013,024

Present value of cash outflow: $2,000,000

Net Present value of Machine = Present value of cash Outflow - Present value of Cash Inflow

= $2,013,024 - $2,000,000

= $13,024

Solution- B: Yes, the Hosptial should acquire the MRI since it gives a positive NPV of $13,024.

Solution-C:

Non- Financial Considerations:

- Whether the Machine is advanced version and will be upgradable to new technologies throughout the economic years (10 years).

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