A. (46,650) no B. 50,800 yes C. (46,650) yes D. 33,910 yes Answer the following
ID: 2560933 • Letter: A
Question
A. (46,650) no
B. 50,800 yes
C. (46,650) yes
D. 33,910 yes
Answer the following questions using the information below: 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 S80,000. The new machine will cost $600,000 and an additional cash investment in working capital of 5,000 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 18%? Would the hospital want to purchase the new machine?Explanation / Answer
Answer: A. (46,650) no
Working notes for the answer
Calculation of the Net Prasent value is as under
Iniital Investment
Cost of machine
600,000
Add: woring capital
25000
less: sale of existing machine
-80,000
Iniital Investment
545,000
Year
cash
flow
Pv factor
at the rate 18%
Prasent
value
A
B
C=A*B
0
-545,000
1
-545000
1
50,000
0.847
42350
2
200,000
0.718
143600
3
200,000
0.609
121800
1
200,000
0.516
103200
5
200,000
0.437
87400
NPV
-46650
NPV of the project is (46,650) negative
As the NPV of the project is negative so it should not be purchased
Iniital Investment
Cost of machine
600,000
Add: woring capital
25000
less: sale of existing machine
-80,000
Iniital Investment
545,000
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