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 20%? Would the hospital want to purchase the new machine?

Question

Quizplus · Accepted Answer

The net present value (NPV) of the investment can be calculated by considering the initial outlay, the annual cash inflows, and the salvage value of the old machine, discounted at the required rate of return of 20%. The initial outlay includes the cost of the new machine ($325,000), the additional working capital ($10,000), and the opportunity cost of selling the old machine now ($45,000). The annual cash inflows are $30,000 for the first year and $120,000 for the next four years. Since the working capital investment is not recovered, it is a cost. The NPV calculation shows a negative result, indicating that the investment would result in a loss, thus the hospital would not want to purchase the new machine.

Answer the Following Questions Using the Information Below