Scenario

Healthcare America is weighing the purchase of a new $3M MRI facility to serve its expanding presence in the area of orthopedic medicine. The expectation is that the machine will be nearly fully utilized in next five years. The government recently exempted taxes on profits from new investments to encourage capital investments. The equipment is expected to have 10 years of useful life with no salvage value. The company employs straight-line depreciation. Net cash inflows of $800,000 are expected each year for five years. The company uses a rate of 9% in evaluating its capital investment projects.

Instructions

1. Explain your overall approach to evaluating the capital purchase.

• What criteria are most important?
• What questions do you need answered?

1. Justify your choice of three capital investment measures that you believe best support a responsible recommendation.
2. Perform the calculations for each of your chosen measures. (Note: If you need more data for your chosen methods, make sure to state your assumptions or reasonably chosen data values.)
3. Recommend your choice on whether or not to make this investment with support from your calculations and the other considerations stated in your overall approach.
4. Describe the two most significant risks associated with your recommendation from a cost accounting perspective.