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.
-If the net cash inflows were $20 000 in the first year and $100 000 in the following years,should the X-ray machine be purchased? What is the net present value of the investment,assuming the required rate of return is 14%? Would the hospital want to purchase the new machine?

Question

Quizplus · Accepted Answer

To determine if the X-ray machine should be purchased, we need to calculate the net present value (NPV) of the investment using the required rate of return of 14%.

Year 0: - $325,000 - $10,000 = -$335,000 (Initial cost plus working capital investment)
Year 1: $30,000 + $20,000 = $50,000
Year 2-5: $120,000 per year = $480,000

Using a financial calculator or spreadsheet, the NPV of this investment is -$16,960. This is a negative NPV, indicating that the investment does not meet the required rate of return and should not be undertaken.

Therefore, the hospital would not want to purchase the new machine.

Answer the Following Questions Using the Information Below