21-19

Payback period c. Discounted payback period d. Internal rate of return (using the interpolation method) e. Accrual accounting rate of return based on the net initial investment (assumestraight-line depreciation) 2. What other factors should Riverbend consider in decinding whether to purchase the new computer system? 21-18 Capital budgeting methods, no income taxes. City Hospital, a nonprofit 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. 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? 21-19 Capital budgeting, income taxes. Assume the same facts as in Exercise 21-18 except that City Hospital is a taxpaying entity. The income tax rate is 30% for all transactions that attect income taxes. 1 Do requirement 1 of Exercise 21-18. 2. How would your computations in requirement 1 be affected if the special-purpose machine had a $10,000 terminal disposal value at the end of 10 years? Assume depreciation deductors are based on the $110,000 purchase cost and zero terminal disposal value using the straight-line method. Answer briefly in words without further calculations