Museum Clinic has been under pressure to keep costs down. The clinic administrator has been managing various
Question:
Museum Clinic has been under pressure to keep costs down. The clinic administrator has been managing various revenue-producing centers to maximize contributions to the recovery of the operating costs of the clinic as a whole. The administrator has been considering whether to buy a special-purpose CAT scan machine for $251,000. Its unique characteristics would generate additional cash operating income of $50,000 per year for the clinic as a whole.
The clinic expects the machine to have a useful life of 8 years and a terminal salvage value of $35,000. The machine is delicate. It requires a constant inventory of various supplies and spare parts. When the clinic uses some of these items, it instantly replaces them so it maintains an investment of $7,000 at all times. However, the clinic fully recovers this investment at the end of the useful life of the machine.
1. Compute NPV if the required rate of return is 10%.
2. Compute the ARR on (a) the initial investment and (b) the “average” investment. Assume straight-line depreciation.
3. Why might the administrator be reluctant to base her decision on the DCF model?
Salvage ValueSalvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Step by Step Answer:
Introduction to Management Accounting
ISBN: 978-0133058789
16th edition
Authors: Charles Horngren, Gary Sundem, Jeff Schatzberg, Dave Burgsta