Dental Ltd is a cosmetic dental clinic that offers a range of teeth procedures. Dr Smile from the clinic is looking at purchasing a new dental chair for patience to lie on during their treatment. The institute has narrowed down its search to the following chairs a) the "Interactive" (plays music to help patience relax) or b) the "Massage" (gently massages patience to relax them).  The management accountant has indicated the capital budget for the Institute is limited to $295,000 and the required rate of return is 12%.  Ignore depreciation and tax in answering this question.

 

Year	Interactive	Massage
	$	$
1	95,000	80,000
2	95,000	100,000
3	95,000	110,000
4	95,000	170,000
5	95,000	180,000

Additional Information:

• Purchase price: Interactive $280,000, Massage $290,000,
• Delivery fee for the Massage $40,000,
• The Interactive will require a yearly maintenance of $2,000 over its life span,
• The Massage requires an upholstery overhaul of $2,500 in the 3rd year,
• If the centre proceeds with the capital purchase of the Massage they are expecting to make one employee redundant. The wages of this staff member equates to $3,000 per year.
• The management accountant has indicated that if the business proceeds with either chair, the business will be compelled to sign up to a yearly online subscription of $500 per annum which offers them online support and updates on how to best manage the features of the chairs.

 

You are required to answer all questions. Where necessary round off to two decimal places, do not use formulas to calculate the return rates. All workings must be shown. 

 

Tables below:

 Present value of $1.00 

Periods	8%	10%	12%	14%	16%	18%
1	0.926	0.909	0.893	0.877	0.862	0.847
2	0.857	0.826	0.797	0.769	0.743	0.718
3	0.794	0.751	0.712	0.675	0.641	0.609
4	0.735	0.683	0.636	0.592	0.552	0.516
5	0.681	0.621	0.567	0.519	0.476	0.437

                                                                                         

 Present value of an ordinary annuity of $1.00 

Periods	6%	8%	10%	12%	14%	15%
1	0.943	0.926	0.909	0.893	0.877	0.870
2	1.833	1.783	1.736	1.690	1.647	1.626
3	2.673	2.577	2.487	2.402	2.322	2.283
4	3.465	3.312	3.170	3.037	2.914	2.855
5	4.212	3.993	3.791	3.605	3.433	3.352

a. Calculate the payback period for each item.

b. Calculate the Net Present Value (NPV) for each item. 

c. Based on the two techniques applied above discuss which dental chair the business should invest in and why?