Capital Investments with Independent Projects A hospital is considering the possibility of two new purchases: new X-ray equipment and new biopsy equipment. Each project would require an investment of $750,000. The expected life for each is 5 years with no expected salvage value. The net cash

Question

Capital Investments with Independent Projects

A hospital is considering the possibility of two new purchases: new X-ray equipment and new biopsy equipment. Each project would require an investment of $750,000. The expected life for each is 5 years with no expected salvage value. The net cash inflows associated with the two independent projects are as follows:

Year	X-Ray Equipment	Biopsy Equipment
1	$375,000	$ 75,000
2	150,000	75,000
3	300,000	52,000
4	150,000	600,000
5	75,000	675,000

Required:
1. Compute the net present value of each project, assuming a required rate of 12%.
2. Compute the payback period for each project. Assume that the manager of the hospital accepts only projects with a payback period of 3 years or less. Offer some reasons why this may be a rational strategy, even though the NPV computed in Requirement 1 may indicate otherwise

Accepted Answer

1. X-ray equipment:

Year	Cash Flow	Discount Factor*	Present Value
0	$(750,000)	1	$(750,000)
1	375,000	0.89286	334,823
2	150,000	0.79719	119,579
3	300,000	0.71178	213,534
4	150,000	0.63552	95,328
5	75,000	0.56743	42,557
NPV			$55,821

Biopsy equipment:

Year	Cash Flow	Discount Factor*	Present Value
0	$(750,000)	1	$(750,000)
1	75,000	0.89286	66,965
2	75,000	0.79719	59,789
3	52,000	0.71178	373,685
4	600,000	0.63552	381,312
5	675,000	0.56743	383,015
NPV			$514,766

2. X-ray equipment:
Payback Period = $375,000 1.00 year
150,000 1.00
225,000 0.75 ($225,000/$300,000)
$750,000 2.75 years
Biopsy equipment:
Payback Period = $ 75,000 1.00 year
75,000 1.00
525,000 1.00
75,000 0.13 ($75,000/$600,000)
$750,000 3.13 years

Question 12.RP.2: Capital Investments with Independent Projects A hospital is ...

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