Calculate net present value and payback period


Question:

Capital budgeting methods, no income taxes. City Hospital, a non-profit organization, estimates that it can save $28,000 a year in cash operating costs for the next 10 years if it buys a special-purpose eye-testing machine at a cost of $110,000. No terminal disposal value is expected. City Hospital's required rate of return is 14%. Assume all cash flows occur at year-end except for initial investment amounts. City Hospital uses straight-line depreciation.

Required

1. Calculate the following for the special-purpose eye-testing machine:

a-Net present value
b-Payback period
c- Internal rate of return
d -Accrual accounting rate of return based on net initial investment
e- Accrual accounting rate of return based on average investment

2. What other factors should City Hospital consider in deciding whether to purchase the special- purpose eye-testing machine?

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Accounting Basics: Calculate net present value and payback period
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