City Hospital, a nonprofit organization, estimates that it can save $ 28,000 a year in cash operating costs for the next 10 years if it buys a special-purpose eye-testing machine at a cost of $ 110,000. No terminal disposal value is expected. City Hospital’s required rate of return is 14%. Assume all cash flows occur at year-end except for initial investment amounts. City Hospital uses straight-line depreciation.
1. Calculate the following for the special-purpose eye-testing machine:
a. Net present value
b. Payback period
c. Internal rate of return
d. Accrual accounting rate of return based on net initial investment
e. Accrual accounting rate of return based on average investment
2. What other factors should City Hospital consider in deciding whether to purchase the special-purpose eye-testing machine?