Question

Daisy Hill Hospital is planning to replace its CT scan machine. The machine system costs approximately $2,500,000, and an additional $500,000 for installation. Estimated charges per scan is $600. There is an estimated weekly utilization (volume) of 30 scans. Each scan will cost the hospital $35 in supplies. The system is expected to operate for $50 weeks per year. Associated annual labor costs for purchasing the CT scan machine is an estimated $100,000. Maintenance costs are estimated to be $80,000, and the machine is expected to be in operation for a period of 5 years. The machine may sell for approximately $500,000 salvage value. Daisy Hill has an 8% corporate cost of capital, and inflation is expected to average 3% over the period.

Cash Revenues and Costs

0

1

2

3

4

5

Line 1

System cost

Line 2

Installation expenses

Line 3

Total cost

Line 4

Net revenues

Line 5

Labor costs

Line 6

Maintenance cost

Line 7

Supplies

Line 8

Net operating income

Line 9

Salvage value

Line 10

Net cash flow

Line 11

CCC

Line 12

NPV

Line 13

IRR

Answer 1

Inflation adjusted Cost of Capital = (1 + Cost of Capital) / (1+ Inflation rate) - 1

Inflation adjusted Cost of Capital = (1 + 0.08) / (1+ 0.03) - 1

Inflation adjusted Cost of Capital = 6.80%