NPV Versus Internal Rate of ReturnKeating 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 GoodviewAnnual$720,000 $900,000revenuesAnnualoperating445,000655,000costsSystem900,000800,000investmentProject life 5 years5 yearsAssume 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:1. Calculate the NPV for the Clearlook System.2. Calculate the NPV for the Goodview System.Which MRI system would be chosen?3. 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 factorIRRClearlook:%Goodview:Why IRR is not suitable for choosing among these mutually exclusive investments.

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Required: 1. Calculate the NPV for the Clearlook System. 2. Calculate the NPV for the Goodview System. Which MRI system would be chosen? 3. What if Keating Hospital wants to know why IRR is not being used for the investment analysis? Calculate rounds to 11% and should be entered as "11" in the answer box.) Discount factor IRR Clearlook: Goodview:

Required: 1. Calculate the NPV for the Clearlook System. 2. Calculate the NPV for the Goodview System. Which MRI system would be chosen? 3. What if Keating Hospital wants to know why IRR is not being used for the investment analysis? Calculate rounds to 11% and should be entered as "11" in the answer box.) Discount factor IRR Clearlook: Goodview:

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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NPV Versus Internal Rate of Return
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
$720,000 $900,000
revenues
Annual
operating
445,000
655,000
costs
System
900,000
800,000
investment
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:
1. Calculate the NPV for the Clearlook System.
2. Calculate the NPV for the Goodview System.
Which MRI system would be chosen?
3. 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.

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