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

		Cash revenues & costs at nominal values
	Year	0	1	2	3	4	5
Line 1	System costs	-2500000
Line 2	Installation expenses	-500000
Line 3	Total cost	-3000000
Line 4	Net revenues(600*30*50)		900000	927000	954810	983454	1012958
Line 5	Labor costs		-100000	-103000	-106090	-109273	-112551
Line 6	Maintenance costs		-80000	-82400	-84872	-87418	-90041
Line 7	Supplies(30*50*35)		-52500	-54075	-55697	-57368	-59089
Line 8	Net operating Income		667500	687525	708151	729395	751277
Line 9	Salvage value						500000
Line 10	Net cash flow	-3000000	1335000	1375050	1416302	1458791	2002554
Line 11	CCC	8%
Line 12	NPV	2974460.03
Line 13	IRR	39%
NPV calculations:
Line 10	Net cash flow	-3000000	1335000	1375050	1416302	1458791	2002554
PV F at 85(1/1.08^Yr.n)		1	0.92593	0.85734	0.79383	0.73503	0.68058
PV at 8%		-3000000	1236111	1178884	1124306	1072255	1362905
NPV (Sum of above row)		2974460.03