Question

I am trying to determine operating cash flow for years 1, 2, 3 and 4 for a company who is evaluating a new MRI machine. I calculated the revenue based on # of scans times the net revenue for each scan and got $900,000. Should this figure remain the same for years 2, 3, and 4 or does the neutral inflation rate of 2% need to be added to each?

Also, does depreciation, variable and fixed costs change with the 2% neutral inflation rate? I am thinking that fixed costs and depreciation will not change.

1) Assume Bloomington Indiana Mellencamp Health System, a not-for profit hospital, is evaluating a new MRI.
2) Cost
	Purchase price		$500,000
	Shipping and Install		$80,000
3) Expected life			5 years
4) Salvage Value			$250,000
5) Utilization			6000 scans per year
6) Net Revenue			$150 per scan
7) Variable Cost			$75 per scan
8) Fixed cost			$150,000
9) Corporate cost of capital			12%
Using 2% as neutral inflation rate

Answer 1

Revenue, variable costs and fixed costs (excluding deprecition) shall increase by 2% inflation rate every year.Depreciation will remain same.