Laverty Clinic plans to purchase a new centrifuge machine for its New York facility. The machinecosts $94,000 and is expected to have a useful life of 6 years, with a terminal disposal value of $9,000.Savings in cash operating costs are expected to be $24,900 per year. However, additional working capitalis needed to keep the machine running efficiently. The working capital must continually be replaced, so aninvestment of $4,000 needs to be maintained at all times, but this investment is fully recoverable (will be“cashed in”) at the end of the useful life. Laverty Clinic’s required rate of return is 12%. Ignore income taxesin your analysis. Assume all cash flows occur at year-end except for initial investment amounts. LavertyClinic uses straight-line depreciation for its machines. Q. You have the authority to make the purchase decision. Why might you be reluctant to base your decisionon the DCF methods?
Laverty Clinic plans to purchase a new centrifuge machine for its New York facility. The machine
costs $94,000 and is expected to have a useful life of 6 years, with a terminal disposal value of $9,000.
Savings in cash operating costs are expected to be $24,900 per year. However, additional
is needed to keep the machine running efficiently. The working capital must continually be replaced, so an
investment of $4,000 needs to be maintained at all times, but this investment is fully recoverable (will be
“cashed in”) at the end of the useful life. Laverty Clinic’s required
in your analysis. Assume all cash flows occur at year-end except for initial investment amounts. Laverty
Clinic uses straight-line
Q. You have the authority to make the purchase decision. Why might you be reluctant to base your decision
on the DCF methods?
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