A hospital wants to purchase a diagnostic system for $500,000 and depreciate it on a straight - line basis over a five year period for tax purposes. The investment would result in revenues of $225,000 per year, before taxes in Year 1, and increase at 3% for five years. At the end of five years, it is estimated that the system can be sold for $75,000. The gain on the sale would be taxable at the 40% corporate rate. The system also would require hiring two FTE techs to operate it, payable at a rate of $41,700 each per year and increase at a rate of 5% per year. Supply costs are expected to be $ 25,000 per year based on expected utilization and these costs are expected to increase at a rate of 4.2%. Miscellaneous overhead and other associated expenses are expected to be $10,000 per year and increase at a rate of 2% per year. Questions: Is the investment in the machine attractive in economic terms, given the projected cash flows? Please assume that the cash flows occur at the end of each year, that the tax rate is 40 %, and the appropriate risk - adjusted cost of capital is 7.5%. 1. What is the Net Present Value and Internat Rate of Return? Based on these results, would you recommend funding the project? 2. What is the amount of revenue required per year to break even, given the current operational costs and projections?
A hospital wants to purchase a diagnostic system for $500,000 and depreciate it on a straight - line basis over a five year period for tax purposes. The investment would result in revenues of $225,000 per year, before taxes in Year 1, and increase at 3% for five years. At the end of five years, it is estimated that the system can be sold for $75,000. The gain on the sale would be taxable at the 40% corporate rate. The system also would require hiring two FTE techs to operate it, payable at a rate of $41,700 each per year and increase at a rate of 5% per year. Supply costs are expected to be $ 25,000 per year based on expected utilization and these costs are expected to increase at a rate of 4.2%. Miscellaneous overhead and other associated expenses are expected to be $10,000 per year and increase at a rate of 2% per year. Questions: Is the investment in the machine attractive in economic terms, given the projected cash flows? Please assume that the cash flows occur at the end of each year, that the tax rate is 40 %, and the appropriate risk - adjusted cost of capital is 7.5%. 1. What is the Net Present Value and Internat Rate of Return? Based on these results, would you recommend funding the project? 2. What is the amount of revenue required per year to break even, given the current operational costs and projections?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A hospital wants to purchase a diagnostic system for $500,000 and depreciate it on a straight-line basis over a five year
period for tax purposes. The investment would result in revenues of $225,000 per year, before taxes in Year 1, and
increase at 3% for five years. At the end of five years, it is estimated that the system can be sold for $75,000. The gain on
the sale would be taxable at the 40% corporate rate. The system also would require hiring two FTE techs to operate it,
payable at a rate of $41,700 each per year and increase at a rate of 5% per year. Supply costs are expected to be $
25,000 per year based on expected utilization and these costs are expected to increase at a rate of 4.2%.
Miscellaneous overhead and other associated expenses are expected to be $10,000 per year and increase at a rate of
2% per year. Questions: Is the investment in the machine attractive in economic terms, given the projected cash flows?
Please assume that the cash flows occur at the end of each year, that the tax rate is 40%, and the appropriate risk -
adjusted cost of capital is 7.5%. 1. What is the Net Present Value and Internat Rate of Return? Based on these results,
would you recommend funding the project? 2. What is the amount of revenue required per year to break even, given
the current operational costs and projections?
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