Question

Diemia Hospital has been considering the purchase of a new x-ray machine. The existing machine is operable for three more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $170,000. The new machine will cost $700,000 and an additional cash investment in working capital of $115,000 will be required. The new machine will reduce the average amount of time required to take the x-rays and will allow an additional amount of business to be done at the hospital. The investment is expected to net $150,000 in additional cash inflows during the year of acquisition and $180,000 each additional year of use. The new machine has a three-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life. What is the net present value of the investment, assuming the required rate of return is 9%? Would the hospital want to purchase the new machine?

A) $(27,510); no B) $117,000 no C) $27,510; yes D) $117,000; yes

Answer 1

I assumed that new machine has five year life and Zero disposal value .

Calculate the Net present value (NPV ) of the Investment :
Year	Cash flow	Present value	Net cash flow
		Factor @ 9%
1	$ 150,000	0.917	$ 137,550
2	$ 180,000	0.842	$ 151,560
3	$ 180,000	0.772	$ 138,960
4	$ 180,000	0.708	$ 127,440
5	$ 180,000	0.65	$ 117,000
	Present value of Cash inflow		$ 672,510
	Present value of Cash outflow (Note 1)		($ 645,000)
	Net present value		$ 27,510

Yes, Hospital has the purchase the new machine because Net present value is positive. i.e $ 27,510

Explanation :
Note 1 :
To calculate the present value of cash out flow :
Particulars	Amount($)
Purchase of new machine	$ 700,000
Add: Cost of working capital	$ 115,000
	$ 815,000
Less: Sale of old machine	($ 170,000)
Present value of cash out flow	$ 645,000