Question

(12) 17. A hospital is trying to determine the payback period for a piece of X-Ray equipment it is purchasing. The assumptions are: Purchase price of equipment = $400,000. Useful life of the equipment = 10 years. • Revenue the machine will generate per year = $10,000. Direct operating costs associated with earning revenue = $75,000 Depreciation expense per year = $15,000. a. Find the machine's expected net income b. Find the annual cash inflow the machine is expected to generate c. Compute the payback period

Answer 1

a.

Operating cost is for the whole life.

Operating cost per year = Total operating cost / Useful life

                                       = $75,000 / 10

                                       = 7,500

Net income = Annual revenue – (Operating cost per year + Depreciation per year)

                        = 10,000 – (7,500 + 15,000)

                        = 10,000 – 22,500

                        = - 12,500 (Answer)

Since net income is negative, it is actually net loss.

b.

Cash inflow per year = Annual revenue – Operating cost per year

                                    = 10,000 – 7,500

                                    = 2,500 (Answer)

Note: depreciation is internally generated fund; therefore, it should not be considered in the calculation of cash inflow.

c.

This is the number of years in which the equipment cost is recovered.

Payback period = Equipment cost / Cash inflow per year

                        = 400,000 / 2,500

                        = 160 years (Answer)