Answer the Following Questions Using the Information Below

question 83

Multiple Choice

Answer the following questions using the information below:
Jonesville Hospital has been considering the purchase of a new x-ray machine. The existing machine is operable for five more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $90,000. The new machine will cost $650,000 and an additional cash investment in working capital of $20,000 will be required. The new machine will reduce the average amount of time required to take the x-rays and will allow an additional amount of business to be done at the hospital. The investment is expected to net $60,000 in additional cash inflows during the year of acquisition and $230,000 each additional year of use. The new machine has a five-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life.
-What is the net present value of the investment, assuming the required rate of return is 20%? Would the hospital want to purchase the new machine?

• A)$33,910; yes
• B)$(33,910); no
• C)$(33,910); yes
• D)$50,700; yes

---

Definitions:

Dilution

A reduction in the ownership percentage of a share of stock caused by the issuance of new shares.

Share Price

The market price of a single share of a company's stock, reflecting the value investors place on the company.

Discount Rate

The interest rate used to determine the present value of future cash flows in discounted cash flow analysis.

Expected Cash Flow

The anticipated amount of money that is projected to flow into and out of a business over a specific period.