Capital budgeting methods, no income taxes. City Hospital, a nonprofit organization, estimates that it can save $28,000 ayear in cash operating costs for the next 10 years if it buys a special-purpose eyetesting machine at a cost of $110,000. Noterminal disposal value is expected. City Hospital’s required rate of return is 14%. Assume all cash ows occur at year-endexcept for initial investment amounts. City Hospital uses straight-line depreciation.1. Calculate the following for the special-purpose eye-testing machine:a. Net present valueb. Payback periodc. Internal rate of returnd. Accrual accounting rate of return based on net initial investmente. Accrual accounting rate of return based on average investment2. What other factors should City Hospital consider in deciding whether to purchase the special-purpose eye-testingmachine?

Capital budgeting methods, no income taxes. City Hospital, a nonprofit organization, estimates that it can save $28,000 ayear in cash operating costs for the next 10 years if it buys a special-purpose eyetesting machine at a cost of $110,000. Noterminal disposal value is expected. City Hospital’s required rate of return is 14%. Assume all cash ows occur at year-endexcept for initial investment amounts. City Hospital uses straight-line depreciation.1. Calculate the following for the special-purpose eye-testing machine:a. Net present valueb. Payback periodc. Internal rate of returnd. Accrual accounting rate of return based on net initial investmente. Accrual accounting rate of return based on average investment2. What other factors should City Hospital consider in deciding whether to purchase the special-purpose eye-testingmachine?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 5CE: Keating Hospital is considering two different low-field MRI systems: the Clearlook System and the...

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Keating Hospital is considering two different low-field MRI systems: the Clearlook System and the Goodview System. The projected annual revenues, annual costs, capital outlays, and project life for each system (in after-tax cash flows) are as follows: Clearlook Goodview Annual revenues $720,000 $900,000 Annual operating costs 445,000 655,000 System investment 900,000 800,000 Project life 5 years 5 years Assume that the cost of capital for the company is 8%. Required: 1. Calculate the NPV for the Clearlook System. 2. Calculate the NPV for the Goodview System. Which MRI system would be chosen? 3. What if Keating Hospital wants to know why IRR is not being used for the investment analysis? Calculate the IRR for each project and explain why it is not suitable for choosing among…
Keating Hospital is considering two different low-field MRI systems: the Clearlook System and the Goodview System. The projected annual revenues, annual costs, capital outlays, and project life for each system (in after-tax cash flows) are as follows: Clearlook Goodview Annual revenues $720,000 $900,000 Annual operating costs 445,000 655,000 System investment 900,000 800,000 Project life 5 years 5 years Assume that the cost of capital for the company is 8 percent. The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems. Required: Calculate the NPV for the Clearlook System.$ Calculate the NPV for the Goodview System.$ Which MRI system would be chosen? Clearlook System Goodview System3. What if Keating Hospital wants to know why IRR is not being used for the investment analysis? Calculate the IRR for each project. Round the discount factor to three decimal places. Round the IRR…
City Hospital, a nonprofit organization, estimatesthat it can save $28,000 a year in cash operating costs for the next 10 years if it buys a special-purpose eyetestingmachine at a cost of $110,000. No terminal disposal value is expected. City Hospital’s required rate ofreturn is 14%. Assume all cash flows occur at year-end except for initial investment amounts. City Hospitaluses straight-line depreciation. Q.What other factors should City Hospital consider in deciding whether to purchase the special-purposeeye-testing machine?
Wisconsin Dairy Inc. is deciding on its capital budget forthe upcoming year. Among the projects being considered are two machines, W and WW. Wcosts $500,000 and will produce expected after-tax cash flows of $300,000 during the next2 years. WW also costs $500,000, but it will produce after-tax cash flows of $165,000 duringthe next 4 years. Both projects have a 10% WACC.a. If the projects are independent and not repeatable, which project or projects should thecompany accept?b. If the projects are mutually exclusive but are not repeatable, which project should thecompany accept?c. Assume that the projects are mutually exclusive and can be repeated indefinitely.1. Use the replacement chain method to determine the NPV of the project selected.2. Use the equivalent annual annuity method to determine the annuity of the projectselected.d. Could a replacement chain analysis be modified for use where the project’s cash flowsare different each time it is repeated? Explain.
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A city government is considering two types oftown-dump sanitary systems. Design A requires aninitial outlay of $400,000 with annual operating andmaintenance costs of $50,000 for the next 15 years;design B calls for an investment of $300,000 withannual operating and maintenance costs of $80,000per year for the next 15 years. Fee collections fromthe residents would again be $85,000 per year. Theinterest rate is 8%, and no salvage value is associatedwith either system.(a) Using the benefit–cost ratio BC(i), which systemshould be selected?M16_PARK9091_06_GE_C16.indd 901 10/22/15 5:22 PM902 Chapter 16 Economic Analysis in the Service SectIf a new design (design C), which requires aninitial outlay of $350,000 and annual operatingand maintenance costs of $65,000, is proposed,would your answer in part (a) change?
Semper pump company has a permanent funding requirement of $135,000 in operating asset and seasonal funding requirement that vary between $0 and $990,000 and average $101,250. If simper can borrow short-term funds at 6.25% and long term funds at 8%, and if it can earn 5% on the investment of any surplus balances, than determine the total annual cost under i) aggressive strategy ii) conservative strategy
The investment committee of Sentry Insurance Co. is evaluating two projects, office expansion and upgrade to computer servers. The projects have different useful lives, but each requires an investment of $490,000. The estimated net cash flows from each project are as follows: Net Cash Flows Year Office Expansion Servers 1 $125,000 $165,000 2 125,000 165,000 3 125,000 165,000 4 125,000 165,000 5 125,000 6 125,000 The committee has selected a rate of 12% for purposes of net present value analysis. It also estimates that the residual value at the end of each project's useful life is $0, but at the end of the fourth year, the office expansion's residual value would be $180,000. Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432…
, a worldwide health care company, looks to invest $50 million in new technologies for diagnostic instrument systems. This investment into research and development would appear in which of Abbot's budgets? a) cash budget b) capital budget c) operating budget d) zero-balance budget Saved
Wisconsin Dairy Inc. is deciding on its capital budget for the upcoming year. Among the projects being considered are two machines, W and WW. W costs $500,000 and will produce expected after-tax cash flows of $300,000 during the next 2 years. WW also costs $500,000, but it will produce after-tax cash flows of $165,000 during the next 4 years. Both projects have a 10% WACC. If the projects are independent and not repeatable, which project(s) should the company accept? If the projects are mutually exclusive but are not repeatable, which project should the company accept? Assume that the projects are mutually exclusive and can be repeated indefinitely. Use the replacement chain method to determine the NPV of the project selected. Use the equivalent annual annuity method to determine the annuity of the project selected.
The investment committee of Sentry Insurance Co. is evaluating two projects, office expansion and upgrade to computer servers. The projects have different useful lives, but each requires an investment of $838,000. The estimated net cash flows from each project are as follows: Net Cash Flow Year Office Expansion Server 1 $234,000 $309,000 2 234,000 309,000 3 234,000 309,000 4 234,000 309,000 5 234,000 6 234,000 The committee has selected a rate of 15% for purposes of net present value analysis. It also estimates that the residual value at the end of each project's useful life is $0, but at the end of the fourth year, the office expansion's residual value would be $293,000. Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665…