1 ABC Day Surgery Center wants to purchase ventilator equipment for $10,000 with projected cash flows (net...
Question:
1 ABC Day Surgery Center wants to purchase ventilator equipment for $10,000 with projected cash flows (net revenues minus expenses) of $3,000 per year during the equipment's five-year useful life. The CFO of the surgery center would like to calculate the NPV at an interest rate of 10 percent. The company plans to keep the equipment for only 5 years. The equipment would be purchased in the present, when n = 0. The first cash inflow will occur one year in the future, when n = 1 and the last cash inflow will occur 5 years in the future, when n = 5. See the table below.
a. What is the present value of each cash flow in years 1-5? Show in the table below.
b. What is the net present value of the entire investment? NPV: _$_________________
c. Based on the net present value, should the company make this investment? Why or why not?
d. How would ABC Day Surgery find the internal rate of return (IRR) to this investment? Just set up the problem, you do not have to solve for the internal rate of return:
e. An analyst at ABC Day Surgery Center determines that investing in this equipment represents greater than average risk for the company. The Center adds or subtracts 2 percentage points to evaluate projects of more or less risk. Now find the net present value of the investment, using the appropriate cost of capital. NPV: _$_______________
Year | Cash Flow | Present Value of Cash Flow: |
Year 0 | ($10,000) | |
Year 1 | $3,000 | |
Year 2 | $3,000 | |
Year 3 | $3,000 | |
Year 4 | $3,000 | |
Year 5 | $3,000 |
Managerial Accounting Creating Value in a Dynamic Business Environment
ISBN: 978-0078025662
10th edition
Authors: Ronald Hilton, David Platt