Answer the following questions using the information below:
Footscray Hospital is considering purchasing a new x-ray machine.The existing machine is operable for five more years and will have a zero disposal price.The machine may be sold for $45 000 now.The new machine will cost $325 000 and an additional cash investment in working capital of $10 000 will be required.The new machine will reduce the average time required to take x-rays and will allow additional business to be done at the hospital.The investment is expected to net $30 000 in additional cash inflows during the year of acquisition and $120 000 each additional year of use.The new machine has a five-year life,and zero disposal value.These cash flows will occur throughout the year but are recognised at the end of each year.Ignore income taxes.The working capital investment will not be recovered at the end of the asset's life.
-What is the net present value of the investment,assuming the required rate of return is 12%? Would the hospital want to purchase the new machine?

Question

Quizplus · Accepted Answer

To calculate the NPV of the investment, we need to find the present value of all cash inflows (additional cash inflows during the year of acquisition and each additional year of use) and outflows (cost of purchasing the new machine and working capital investment). 
Year 0: -325,000 (cost of new machine) -10,000 (working capital investment) +45,000 (sale of old machine) +30,000 (additional cash inflow) = -$260,000
Year 1: $120,000
Year 2: $120,000
Year 3: $120,000
Year 4: $120,000
Year 5: $120,000

Using a financial calculator or spreadsheet, we can find the NPV to be $62,235. This means that the investment is expected to earn a return greater than the required rate of 12%, and thus the hospital should purchase the new machine.

Therefore, the best choice is C.

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