Keating Hospital is considering two different low-field MRI systems: the Clearlook System and the Goodview System. The projected annual revenues, annual costs, capital outlays, and project life for each system (in after-tax cash flows) are as follows: Clearlook Goodview Annual revenues $720,000 $900,000 Annual operating costs 445,000 655,000 System investment 900,000 800,000 Project life 5 years 5 years Assume that the cost of capital for the company is 8 percent. The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems. Required: Calculate the NPV for the Clearlook System. $ Calculate the NPV for the Goodview System. $ Which MRI system would be chosen? Clearlook System Goodview System3. What if Keating Hospital wants to know why IRR is not being used for the investment analysis? Calculate the IRR for each project. Round the discount factor to three decimal places. Round the IRR to the nearest whole percentage value (for example, 10.6% rounds to 11% and should be entered as "11" in the answer box.) Discount factor IRR Clearlook: % Goodview: % Why IRR is not suitable for choosing among these mutually exclusive investments. IRR does not reveal the absolute dollar contribution that each project makes IRR ignores the time value of money IRR does not consider all the cash returns provided by the project

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Keating Hospital is considering two different low-field MRI systems: the Clearlook System and the Goodview System. The projected annual revenues, annual costs, capital outlays, and project life for each system (in after-tax cash flows) are as follows:

	Clearlook	Goodview
Annual revenues	$720,000	$900,000
Annual operating costs	445,000	655,000
System investment	900,000	800,000
Project life	5 years	5 years

Assume that the cost of capital for the company is 8 percent.

The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems.

Required:

Calculate the NPV for the Clearlook System.
$
Calculate the NPV for the Goodview System.
$

Which MRI system would be chosen?

Clearlook System
Goodview System3. What if Keating Hospital wants to know why IRR is not being used for the investment analysis? Calculate the IRR for each project. Round the discount factor to three decimal places. Round the IRR to the nearest whole percentage value (for example, 10.6% rounds to 11% and should be entered as "11" in the answer box.)

	Discount factor	IRR

Clearlook:		%
Goodview:		%

Why IRR is not suitable for choosing among these mutually exclusive investments.
IRR does not reveal the absolute dollar contribution that each project makes
IRR ignores the time value of money
IRR does not consider all the cash returns provided by the project

Roberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is $2,293,200. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows:

Year	Cash Revenues	Cash Expenses
1	$2,981,160	$2,293,200
2	2,981,160	2,293,200
3	2,981,160	2,293,200
4	2,981,160	2,293,200
5	2,981,160	2,293,200

The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems.

Required:

Compute the project’s payback period. If required, round your answer to two decimal places.

years

Compute the project’s accounting rate of return. Enter your answer as a whole percentage value (for example, 16% should be entered as "16" in the answer box).

Compute the project’s net present value, assuming a required rate of return of 10 percent. When required, round your answer to the nearest dollar.
$

Compute the project’s internal rate of return. Enter your answers as whole percentage values (for example, 16% should be entered as "16" in the answer box).

Between

% and

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