Newman Medical Center is considering purchasing an ultrasound machine for $1,170,000. The machine has a 10-year life and an estimated salvage value of $30,000. The center uses straight-line depreciation. Newman's cost of capital is 9%.
The medical center estimates that the machine will be used five times a week with the average charge to the patient for ultrasound of $775. There are $5 in medical supplies and $20 of technician costs for each procedure performed using the machine. The present value of an annuity factor for 10 years at 9% is 6.41766, and the present value of a single sum factor for 10 years at 9% is .42241
Instructions
1. For the new ultrasound machine, compute the:
(a) cash payback period.
(b) net present value.
(c) annual rate of return.
2. Should the Center purchase this new ultrasound machine? Explain your answer fully.