Interpretation of present value analysis-calculate annual cash flow
Response to the following problem:
Memorial Hospital is considering the acquisition of a new diagnostic scanning machine. The investment required to get the machine operational will be $2,466,840. The machine will be capable of performing 7,500 scanning procedures per year, but based on the experience of other hospitals, management estimates that the machine will be used at 80% of its capacity. The hospital's cost of capital is 12%; the machine has an estimated useful life of six years and no salvage value.
Required:
a. Assuming a constant cash flow every year, calculate the annual net cash flow required from the scanner if the IRR of the investment is to equal 12%. (Hint: The annual net cash flow requirement is an annuity.)
b. If the direct cash costs of operating the scanner equal 50% of the annual net cash flow requirement calculated in part a, what price should the hospital charge per scanning procedure in order to achieve a 12% ROI?