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Question 2. The Dental Institute of Melbourne offers a range of dental procedures. The Institute is looking at purchasing a new state of the art

Question 2.

The Dental Institute of Melbourne offers a range of dental procedures. The Institute is looking at purchasing a new state of the art dental chair to help relax young children who are often frighten of dentist. The institute has narrowed down its search to the following chairs a) Musical or b) Disney. The management accountant has indicated the capital budget for the Institute is limited to $300,000 and the required rate of return is 12%. Ignore depreciation and tax in answering this question.

The after-tax cash inflows are as follows:

Year

Musical

Disney

$

$

1

120,000

90,000

2

120,000

150,000

3

120,000

160,000

4

120,000

170,000

5

120,000

180,000

Additional Information:

  • Purchase price: Musical $300,000, Disney $290,000,
  • Delivery fee for the Disney $40,000,
  • The Musical will require a yearly maintenance of $2,000 over its life span,
  • The Disney requires an upholstery overhaul of $2,500 in the 3rd year,
  • If the center proceeds with the capital purchase of the Disney they are expecting to make one employee redundant. The wages of this staff member equates to $3,000 per year.
  • Regardless of which chair the institute buys they will be required to pay membership for accreditation to the National Dental Institute to the value of $500 p/a.
  • The business has outlined that they will not invest in projects that don't provide a minimum of a 40% return.

REQUIRED: (Please use the PV Tables found below and show ALL workings)

a) Calculate the payback period foreachitem.

b)Calculate the Net Present Value (NPV) for each item. c) Based on your answers calculated in part a and b above explain which project the business should invest in and why.

d) Given the business has specified it will not favour projects that return less than 35% should it proceed with the Musical? Support your answer using calculations.

(4+6+3+3=16 marks)

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

8%

10%

12%

14%

15%

16%

1

0.926

0.909

0.893

0.877

0.870

0.862

2

1.783

1.736

1.690

1.647

1.626

1.605

3

2.577

2.487

2.402

2.322

2.283

2.245

4

3.312

3.170

3.037

2.914

2.855

2.798

5

3.993

3.791

3.605

3.433

3.352

3.274

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