Question

Doctors Mowtain, Lawrence, and Curley are radiologists living in Yukville, Maine. They realize that many of the state’s small, rural hospitals cannot afford to purchase their own magnetic resonance imaging devices (MRIs). The doctors are considering whether it would be feasible for them to form a corporation and invest in their own MRI unit. The unit would be transported on a scheduled basis to more than 80 rural hospitals using an 18-wheel tractor-trailer. The cost of a tractor-trailer equipped with MRI equipment is approximately $1,500,000. The estimated life of the investment is nine years, after which time its salvage value is expected to be no more than $200,000.
The doctors anticipate that the investment will generate incremental revenue of $900,000 per year. Incremental expenses (which include depreciation, insurance, fuel, maintenance, their salaries, and income taxes) will average $800,000 per year. Net incremental cash flows will be reinvested back into the corporation. The only difference between incremental cash flows and incremental income is attributable to depreciation expense. The doctors require a minimum return on their investment of 15 percent.

Instructions
a. Compute the payback period of the mobile MRI proposal.
b. Compute the return on average investment of the proposal.
c. Compute the net present value of the proposal using the tables in Exhibits 26–3 and 26–4. Comment on what the actual rate of return might be.
d. What nonfinancial factors should the doctors consider in making this decision?
In Exhibits 26–3


In Exhibits26–4


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  • CreatedApril 17, 2014
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