Question

Cash Revenues and Costs 1. System cost ($2,00o,000) expenses (00,000) 3. Total cost ($2,500,000) $750,000 S787.50 $826,875 $868,219 S 911,630 5. Labor costs 6. Maintenance (60,000) (63.000) (66.150) (69.457) (72,930) 50,000) (157-500) 65.375)(173,644) (182.326) 7. Supplies 8. Net operating (0,000) (31.500) (3.075) (4.729)6465) $510,000 $535.500 $562,275 $590,389 S619.908 9. Salvage value 750,000 10. Net cash flow (S2,500,ooo) $510,000 $535,500 $562,275 $590,389 S1,369.908 Profitability measures (from Chapter g Net present value-$82,493 Internal rate of return-11.1%. For the assignment this week, you are considering the purchase of a new MRI machine for Bayside Memorial hospital. Thin 2 pes of patients you will be seeing. what types of care you will provide, and the members of the team that you have assembled. Remember that the financial analysis provides much of the guidelines for all decision making in the purchase Instructions Using the chart of cash revenues and costs read and explain the results of the cash flow analysis. make the purchase or not. Requirements fnow Explain sunk costs, opportunity costs, strategic value and inflation effects. Then provide your decision on whether to 3 0

Answer 1

The cash flow analysis shows the net cash inflow in the five years of data after installing the new system. The incremental cash flow is the additional cash flow that the company expects in additional to the normal cash flow because of the implementation of the new system.

The sunk costs refers to costs that once incurred cannot be recovered. For example, if the hospital did feasibility study to study the affect of brining this new system, then such a cost of a feasibility study is a sunk cost and will not be considered in the analysis.

Opportunity cost refers to the loss from another business. For example, implementing this new system may reduce the overall patient revenue in other departments and that cost of losing patients in other departments because of the implementation of the new system can be referred to as opportunity costs

Strategic value exists when the net present value is positive and there is a positive value addition to the investors and shareholders because of this project.

Inflation affects refers to the loss in the value of money over time. As the economy does well and public at large get higher income, the purchasing power increase and the value of money depletes which can be attributed to inflation

Here, we see that the net present value (NPV) is positive and also the IRR (Internal rate of return) is higher than the discount rate or the cost of capital. Hence my decision would be to ACCEPT the project.