Roxbury 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 X-ray machine for $193,000. Its unique characteristics would generate additional cash operating income of $51,500 per year for the clinic as a whole. 

The clinic expects the machine to have a useful life of six years and a terminal salvage value of $22,000. 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 $15,000 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 14 percent. 

2. Compute the ARR on (a) the initial investment and (b) the “average investment. 

3. Why might the administrator be reluctant to base her decision on the DCF model?