Question

Hamilton General Hospital needs a new MRI machine due to increasing volume of outpatient MRI orders and the state of the existing machine. The current machine is over 10 years old and breaks down on a regular basis, causing significant inconvenience to patients while at the same time, decreasing revenues and increasing costs The new MRI costs $1,100,000 and its useful life is 5 years with a $100,000 salvage value. It is anticipated that it will generate $250,000 of revenue per year for each of the next 5 years. Given the above information: a) Calculate the depreciation expense per year using the straight line method. b) Compute the present value of the yearly cash flows (all 5 years) using a 4% interest (or discount) rate. Hint-use the present value annuity table in your text. Use only the revenue that is projected for each year (ignore depreciation). c) Subtract the original cost of the MRI machine from your answer in b. d) Determine if the project will generate enough cash for the total 5 years to pay for the machine. Hint-just a yes or no. Explain your answer to letter d in a few short sentences. What other factors should be considered before finalizing your decision? e) f) You must show your work in order to receive partial credit if your answers are not correct.

I need help with D, E, F.

Answer 1

a	Calculation of depreciation
	Cost of Machine	A	1100000
	Salvage Value	B	100000
	Depreciable value	C=A-B	1000000
	Life in years	d	10
	Depreciation per year	e=c/d	100000
	on straight line basis
b	Cash flow
Year	Net Cash flow	Discount Rate	Present Value
A	B	C	D=BxC
0		1	0
1	250000	0.961538	240384.6
2	250000	0.924556	231139.1
3	250000	0.888996	222249.1
4	250000	0.854804	213701
5	250000	0.821927	205481.8
	Total Inflow		1112956
c	Deduction of original cost of machine from the total inflow from machine
	Total present value of inflow calculated in c above			A	1112956
	Less Original cost of machine			B	1100000
	Net value			C=A-B	12956
d	Yes
e	Machine is capable enough to generate cash to repay its original cost.
	Even before adding depreciation and tax impact it is providing positive result.
f	other factors need to consider
1	Depreciation
2	Tax rate
3	Capital structure
4	Maintenance of machine
5	sales value of old asset or retention thereof.