Question

Sturgis Medical Clinic (SMC) in Sturgis, SD is considering investing in new medical equipment that would increase its capacity to provide added services to treat patients. The machine will have a 5 year expected life. The projected annual cash flows related to this investment are as follows. Investment in new medical equipment $ 500,000 Shipping cost for new equipment $ 10,000 Installation of new medical equipment 25,000 Required travel and training for staff 55,000 Power upgrade to handle new equipment 10,000 No added working capital will be required to support this project. The projected incremental annual income statement related to the services to be provided by the new machine appears below: Added billed revenue: $650,000 Expected uncollectibles and insurance adjustments 55,000 Cash expenses 345,000 Depreciation (Student compute based on instructions below) Sturgis corporate income tax rate is 40%. Page 2 of 2 Sturgis uses straight-line depreciation on their books and tax return. For this machine, they will use a 5-year depreciation life with $100,000 salvage value. SMC has an after-tax minimum required return on investments of 12%. At the end of 5 years, SMC expects they could remove and sell the medical equipment to a smaller medical center for a net (after costs of removal) cash payment of $100,000. Required (show your calculations): e) Calculate the Net Present Value (NPV) of this investment. f) Calculate the Profitability Index of this investment. g) Calculate the Internal Rate of Return (IRR) for this investment. h) Based upon your calculations should SMC make this investment?

Answer 1