You just got hired at a brand new hospital as a financialanalyst and the Board wants to buy an MRI machine but they areunsure if this makes financial sense. You gather some figures soyou can make an informed decision to present to the Board.(questions 40-44) Use CF’s given, no further calculation has to bedone for CF’s.
Cost of the MRI machine 1.5 million
Salvage value after 5 years 50k
Working capital to hire an operator 200k only initially and notrecoverable.
CF yr 1-3 400k
CF yr 4-5 300k
The hospital currently has no common stock or preferred stock ordebt in their capital structure as it was funded with a 25 milliondollar gift from Bill Gates. The machine is to be financed with a5%, 5 year loan. Interest is tax deductible and the tax rate is30%. ANSWERS IN EXCEL PLEASE
40. The IRR on this MRI machine is:
- 4%
- 3%
- 7.7%
- 6.8%
- T/F Based on the IRR decision criteria we should accept thisproject
42. Based on the NPV analysis what should you recommend to theboard
a. Do not recommend as it will takeaway 89k of value
b. Recommend as it will add 135k invalue
c. Recommend as it will add 177k invalue
d. Do not recommend as it will takeaway 23k of value
43. Assume now that the hospital wasfinanced with 60% debt and 40% equity. The cost of debt is 6% andtaxes are 20%, while the risk free rate is 3%, beta is .8 and thereturn of the market is 9%. If cash flow in years 1-3 are nowassumed to increase to 500k instead of 400k, what would yourecommend to the board?
a. Yes as it adds 136k in value
b. Yes as it adds 98k in value
c. no as the IRRd. Yes as it adds 100k in value
44. T/F the payback under the originalMRI assumptions is 4.67 years
