Question
Chicago hospital, a tax-paying entity, estimates that it can save $30,000 a year in cash operating cost for the next 10 years if it buys
Chicago hospital, a tax-paying entity, estimates that it can save $30,000 a year in cash operating cost for the next 10 years if it buys a special purpose eye testing machine at a cost of $135,000. No terminal disposal value is expected. Chicago's hospitals required rate of return is 10%. Assume all cash flows occur at year-end except for initial investment amounts. Chicago hospital uses straight-line depreciation. The income tax rate is 34% for all transactions that affect income taxes.
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
f. How would your computations in requirement 1 be affected if the special-purpose machine had a $15,000 terminal supposed value at the end of 10 years? Assume depreciation deductions are based on the $135,000 purchase cost and zero turn oil disposal value using the straight-line method. Answer briefly in words without further calculations
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