Question

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City Hosptal, a tapaying enty, eetimales that it can save $28,000 a year in cash operating costs for the next 10 years if it buys a special-purpose aye-lesting machine at a cost of $110,000. No terminal disposal value is expecled City Hosplal's required rate of return is 14%. Assume al cash fows occur at year-end except for inilial imvestment ameunts Cty Hosptal uses straighe-ine deprecietion. The income tax rale is 30% for al transacions hat affect income taes (Click the icon to view the Future Value of $1 factors) Clck the icon to view the FuAre Value of Annuly of $1 factors (Clck the icon to view the Present Value of $1 factors) (Clck the icon to view the Present Value of Annuty of $1 factors) Read the quirements Requirement 1. Calculate the following for the special purpose eye-testing machine a Nat present value (NPR) Round interim caloulations and your final ansers to the nearest whole doilar. Use a minus sign or panantheses for a negatve net present value) 36,044 The net present value is b. Payback period Round your answer to two decimal places) 3.99 years The payback period is Raquiremant 2. How would your computations in requiement 1 be afecied if the special-purpose machine had a $10,000 teminal disposal value a the end of 10 years? Assume depreciation deductions are based on the $110,000 purchase cost and zero terminal dsposal value using the straight-ine method. Anewr briefly in words without further calculations increase because the dsposal valueeuts in an increase in the total present value of cash infows MPV woud Payback would decrease because the disposal value results in an additional cash infow

Answer 1

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Part a
Annual Cash operating cost saving		$       28,000
Less: Tax on Saving of cost		$       (8,400)
Add: Tax Saving on Dep		$          3,300
Annual Net Cash Flow		$       22,900
Tax Saving on Dep:
Annual Depreciation	$110,000/10	$       11,000
Tax Saving on Dep	$11,000*30%	$          3,300
Net Initial Investment		$   (110,000)
Present value of annual cash flow	$22,900*5.216	$     119,446
Present Value		$          9,446
Part b
Net Initial Investment	a	$     110,000
Annual Net Cash Flow	b	$       22,900
Payback Period	a/b	4.80	Years
Part c
NPV would Increase	as it increase PV of cash flow
Payback would decrease	as it gives additional inflow