The Chicago Hope Hospital purchased a MRI machine for $5 million dollars, using a 6 year...

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Finance

The Chicago Hope Hospital purchased a MRI machine for $5 milliondollars, using a 6 year loan at 8% interest.
a. The above MRI machine which costs 5 million comes with aservice charge for an additional amount of $20,000 each year for 5years. What is the present value of cash flows for the MRI machine(use 8% as the discount rate)?
b. The salvage value of the machine is $100,000 five years fromnow. What is the present value of the salvage value of the MRI?

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3.8 Ratings (328 Votes)

Calculation of PV of cash flows
Cash Flows on Cost of machine at year 0 =       -5000000
Year 0 cash flows present value is same as        -5000000

Year 1 to 5 have single cash flows of $20000. So Present Value of Annuity formula will be used.
Discount rate (i)=   8%
Time (n)=   5
Present value of Cash inflows = Annual amount * (1-(1/(1+r)^n) / r
-20000*(1-(1/(1+8%)^5))/8%
-79854.20

So Present Value of Cash flows = -5000000+(-79854.20)=   -$5,079,854.20

Salvage value=   100000
Present value of terminal value = Terminal value/(1+i)^n
100000/(1+8%)^5
68058.3197

So Present Value of Salvage value is   $68,058.32

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Transcribed Image Text

The Chicago Hope Hospital purchased a MRI machine for $5 milliondollars, using a 6 year loan at 8% interest.a. The above MRI machine which costs 5 million comes with aservice charge for an additional amount of $20,000 each year for 5years. What is the present value of cash flows for the MRI machine(use 8% as the discount rate)?b. The salvage value of the machine is $100,000 five years fromnow. What is the present value of the salvage value of the MRI?