Health Care Systems of the South Is About to Buy

question 59

Essay

Health Care Systems of the South is about to buy an expensive piece of diagnostic equipment.The company estimates that it will generate uniform revenues of $500,000 for each of the next eight years.What is the present value of this stream of earnings,at an interest rate of 6%? What is the net present value if the machine lasts only six years,not eight? If the equipment cost $2,750,000,should the company purchase it?

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Definitions:

Reinvestment Rate Risk

The risk that cash flows from an investment will be reinvested at a lower interest rate than the original investment rate, affecting future returns.

Coupon Bond

A type of bond that pays the holder a fixed interest payment (coupon) at regular intervals until the maturity date, at which point the principal is repaid.

Maturity

The date on which a debt must be paid back in full or the final payment is due.

Price Sensitivity

The degree to which the price of a product or service affects consumers' purchasing decisions.