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Paisley Medical Center recently decided to expand its cancer and radiosurgery services by purchasing a gamma knife. The gamma knife is expensive and the hospital
Paisley Medical Center recently decided to expand its cancer and radiosurgery services by purchasing a gamma knife. The gamma knife is expensive and the hospital CFO wasn't sure if enough demand existed in the surrounding Counties to support the project from a business perspective. After consulting with the surgeons, the head of the cancer center as well as the director of surgical services, he was able to gather the following data: Equipment Purchase Price $ 2,500,000 Annual Maintenance Cost (Fixed) $ 484,025 Projected Procedures Year 1 50 Net Revenue per procedure (all years) $ 42,150 Variable Costs per Procedure (all years) $ 16,675 Discount Rate/WACC 12% Volume Growth rate Projected volumes are the same each year (flat) No growth Residual value of Gamma Knife after 5 years Zero Hint: There is no depreciation expense associated with this analysis. All fixed costs are actual cash outflows. Variable costs are cash outflows, and Net Revenues reflect cash inflows
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