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?