Question

1. You have been asked to evaluate the proposed acquisition of a new portable MRI. The system’s price is $70,000 and it will cost another $20,000 for transportation and installation the system is expected to be sold after three years because a new stationary machine will be acquired at that time the best estimate of the system salvage value after three years is $30,000 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 corporate cost of capital is 10% and the standard risk adjustment is 4% points
   1. What is the project's net investment outlay at time 0?

2. What are the projects operating cash flows in years 1, 2, and 3?

3. What is the terminal cash flow at the end of year 3?

4. If the project has average risk, it is expected to be profitable?

PLEASE ANSWER EVERYTHING

Answer 1

A. Net Investment Outlay = System cost + installation&transportation cost at year 0

= ($70,000) +($20,000)

= ($90,000)

B. Operating Cash Flow in Year 1 and Year 2 is $20,000 each year because even though there was no revenue from the system it is projected to save $20,000 in operating costs.

In year 3 the cash flow = operating cost savings + salvage value

= $20,000 + $30,000

= $50,000

C. Terminal Cash Flow at the end of year 3 = (90,000) + 20,000 + 20,000 + 50,000

= (90,000) + 90,000

Terminal Cash Flow = 0 (zero)

D. Cost of capital = 10 %

		NPV
cashflow 0	-90000	-90000
cashflow 1	20000	18181
cashflow 2	20000	16529
cashflow 3	50000	37566
		-17724

NPV = (Cash flow) / (1+r)^t

= ($17,724)

Negative value of NPV shows that the project is not expected to be profitable.