The Chicago Hope Hospital purchased a MRI machine for $5 million dollars, using a 6 year...

The Chicago Hope Hospital purchased a MRI machine for $5 million dollars, using a 6 year loan at 8% interest.

a. The above MRI machine which costs 5 million comes with a service charge for an additional amount of $20,000 each year for 5 years. What is the present value of cash flows for the MRI machine (use 8% as the discount rate)?

b. The salvage value of the machine is $100,000 five years from now. What is the present value of the salvage value of the MRI?

Solutions

Expert Solution

Calculation of PV of cash flows
Cash Flows on Cost of machine at year 0 =       -5000000
Year 0 cash flows present value is same as        -5000000

Year 1 to 5 have single cash flows of $20000. So Present Value of Annuity formula will be used.
Discount rate (i)=   8%
Time (n)=   5
Present value of Cash inflows = Annual amount * (1-(1/(1+r)^n) / r
-20000*(1-(1/(1+8%)^5))/8%
-79854.20

So Present Value of Cash flows = -5000000+(-79854.20)=   -$5,079,854.20

Salvage value=   100000
Present value of terminal value = Terminal value/(1+i)^n
100000/(1+8%)^5
68058.3197

So Present Value of Salvage value is   $68,058.32

jeff jeffy answered 10 months ago

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