Diemia Hospital Has Been Considering the Purchase of a New

question 69

Multiple Choice

Diemia 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 $120,000. The new machine will cost $650,000 and an additional cash investment in working capital of $105,000 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 $130,000 in additional cash inflows during the year of acquisition and $110,000 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 16%? Would the hospital want to purchase the new machine?

• A) $112,060, yes
• B) -$257,620; no
• C) -$257,620; yes
• D) $52,360; yes

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Definitions:

Bailee

A person or entity who is given temporary possession but not ownership of a property or goods for a specific purpose.

Bailed Property

Property that is in the custody of one party but belongs to another, under an agreement for its return or safeguarding.

Public Policy

The principles, often unwritten, on which social laws are based, guiding the governing bodies in their management and administration of the nation.

Bailee

An individual or entity given temporary custody of someone else's property under a bailment agreement.