Initial investment of $100,000 in a new medical equipment. Interest Rate 10% (Borrowed money from a bank). Item Investment Expected Cash Flow PV Factor (1+r) DCF or PV PV (Yr. 1 to 5) + Year 0 100,000 -100,000 Year 1 20,000 Year 2 30,000 Less Investment: NPV Year 3 30,000 $ Year 4 40,000 Year 5 50,000 1. Payback Period Exercise: MRI purchase . . . Initial investment = Annual net cash flow Payback period = Calculation: Answer: $500,000 = $250,000 Investment Amount Net Annual Cash Flow before Taxes 2. Average Rate of Return (ARR) Exercise: MRI Purchase Example . Average Rate of Return = Calculation: Average net income per year Average investment amount = ($510,000 +- $10,000)/2 = $250,000 Answer: = $150,000 Average Net Income Average Investment Amount