(Ignore income taxes in this problem.)Florida Hospital is considering the purcha
ID: 2542512 • Letter: #
Question
(Ignore income taxes in this problem.)Florida Hospital is considering the purchase of an open MRI that would cost $100,000 and would last for 9 years. At the end of 9 years, the machine would have a salvage value of $23,000. The machine would reduce costs by $19,000 per year. Additional working capital of $2,000 would be needed immediately. All of this working capital would be recovered at the end of the life of the machine. Florida Hospital’s cost of capital for this investment is 15%. Should Florida Hospital accepts the proposed project?
Yes, NPV is $3,824Explanation / Answer
Initial Cost = $ 1,00,000 cost + $ 2000 Working Capital
= $ 1,02,000
Present Valu of Inflow = $ 19,000(PVAF 15%,9 Year) + $ 23,000(PVF 15%,9Year) + $ 2000(PVF15%,9Year)
= ($ 19,000 x 4.7716) + ( $ 23000 x 0.2843) + ( $ 2000 x 0.2843 )
= $ 90660 + $ 6539 + $ 568
= $ 97,767
Therefore, Net present Value (NPV) = $ 97,767 - $ 1,02,000 = Negative $ 4,233 Project should not be accepted
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