53. (10 points-5 each) Wayton Medical Center is considering purchasing an ultras

Question

53. (10 points-5 each) Wayton Medical Center is considering purchasing an ultrasound machine for $1,135,000. The machine has a 10-year life and an estimated salvage value of $40,000. Installation costs and freight charges will be $24.300 and $700, respectively The Center uses straight-line depreciation. The medical center estimates that the machine will be used five times a week with the average charge to the patient for ultrasound of $850. There are $10 in medical supplies and $40 of technician costs for each procedure performed using the machine. Instructions (a) Compute the payback period for the new ul (b) Compute the annual rate of return for the new machine.

Explanation / Answer

Answer a Pay back period of new Ultrasound machine = Capitalised cost of new ultrasound machine / Annual net operating cash flow Capitalised cost of new ultrasound machine = Purchase cost + Installation + Freight = $1135000 + $24300 + $700 = $11,60,000 Annual net operating cash flow = Revenue per year - Cost per year = [52 weeks * 5 * $850] - [52 weeks * 5 * $50] = $2,08,000 Pay back period of new Ultrasound machine = $11,60,000 / $2,08,000 = 5.58 years Answer b Annual rate of return for the new machine = Net income per year / Capitalised cost of new machine Net Income per year = Revenue $221,000 Less : Cash costs $13,000 Less : Depreciation $112,000 Net Income per year $96,000 Depreciation per year = (Capitalised cost - salvage value)/useful life in years = ($1160000-$40000)/10 years = $1,12,000 Annual rate of return for the new machine = $96000 / $1160000 = 8.28%

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