You have been asked to evaluate the proposed acquisition of a new clinical laboratory test system. The
Question:
You have been asked to evaluate the proposed acquisition of a new clinical laboratory test system. The system's price is $50,000, and it will cost another $10,000 for transportation and installation. The system is expected to be sold after three years because the laboratory is being moved at that time. The best estimate of the system's salvage value after three years is $20,000. The system will have no impact on volume or reimbursement (and hence revenues), but it is expected to save $20,000 per year in operating costs. The not-for-profit business's corporate cost of capital is 10 percent, and the standard risk adjustment is 4 percentage points.
a.What is the project's net investment outlay at time 0?
b.What are the project's operating cash flows in years 1, 2, and 3?
c.What is the terminal cash flow at the end of year 3?
d.If the project has average risk, is it expected to be profitable?
e.What if the project is judged to have lower-than-average risk? Higher-than-average risk?
Expert Answer:
To evaluate the proposed acquisition of the clinical laboratory test system we need to calculate the projects net investment outlay operating cash flo... View the full answer
