Diemia Hospital has been considering the purchase of a new xray 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​ $150,000. The new machine will cost​ $640,000 and an additional cash investment in working capital of​ $75,000 will be required. The new machine will reduce the average amount of time required to take the xrays 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​ $160,000 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? A. ($157,850) no

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

Diemia Hospital has been considering the purchase of a new xray 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​ $150,000. The new machine will cost​ $640,000 and an additional cash investment in working capital of​ $75,000 will be required.

The new machine will reduce the average amount of time required to take the xrays 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​ $160,000 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?

A. ($157,850) no

B $157,850; yes

C $69,920; yes

D. $42,350; yes

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps

Blurred answer
Knowledge Booster
Capital Budgeting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education