QUESTION $5[20$ MARKS$]$

A hospital is considering to purchase a diagnostic machine costing P$800000.$ The

projected life of the machine is $8$ years and has an expected salvage value of P$60000$

at the end of $8$ years. The annual operating cost of the machine is $75000.$ It is

expected to generate revenues of P$400000$ per year for eight years. Presently, the

hospital is outsourcing the diagnostic work and earning commission income of

P$120000$ per annum; net of taxes.

REQUIRED

a$.$ Advise the hospital management whether it would be profitable to purchase the

machine, basing your recommendation under:

i$.$ Net Present Value Method

ii$.$ Profitability Index Method

b$.$ What are the relative merits and demerits of the following investment appraisal

techniques and what conclusions would you therefore draw about their relative

attractiveness?

i$.$ Payback period; and

ii$.$ Accounting Rate of Return.

Present Factors at $10\%$ are given below: