University of Rochester Medical center is considering purchasing an ultrasound m

Question

University of Rochester 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 (assume straight - line depreciation) - Installation costs and freight charges will be $24,200 and $300, respectively. 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. Compute the payback period for the new ultrasound machine. Compute the annual rate of return for the new machine. Hewlett-Packard Corporation recently purchased a new machine for its factory operations at a cost of $840,000. The investment is expected to generate $250,000 in annual cash flows for a period of five years. The required rate of return is 12%. The new machine is expected to have zero salvage value at the end of the five-year period. Using the internal rate of return method calculate an approximate interest yield for the project. (use tables from Appendix D) Should this project be accepted by Hewlett-Packard and why?

Explanation / Answer

cost of machine 1135000 cost of machine 1160000 installation and freight charges 25000 scrap value 40000 investment in machine 1160000 1120000 depreciation 112000 revenue 221000 cost 13000 profit before depreciation 208000 depreciation 112000 profit after depreciation and tax pay back period initial investment/annual revenue 5.576923 Years Average rate of return average profit / average investment 19.31% Year cash inflow cost of machine 0 -840000 annual revenue 1 250000 2 250000 3 250000 4 250000 5 250000 IRR 14.90% required return 12% project would be accepted as IRR is greater than required rate of return

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