Shrieves Hospital Ltd. is considering adding a new line to its diagnostic product mix, and the capital budgeting analysis is being conducted by Sidney Johnson, a recently graduated MHA. A new bone density scanner would be set up in unused space in Shrieves's main clinic. The machinerys invoice price would be approximately $200,000; another $20,000 in shipping charges would be required; and it would cost an additional $50,000 to install the equipment. The machinery has an economic life of four years, and the machinery is expected to have a salvage value of $25,000 after four years of use. The new line would generate incremental sales of 1,250 scans per year for four years at an incremental cost of $100 per scan in the first year, excluding depreciation. Each scan would generate revenue of $200 in the first year. The hospital's tax rate is 20 percent, and its corporate cost of capital (CCC) is 10 percent. The cash flows in each year are shown below:

Year 0 Year 1 Year 2 Year 3 Year 4 ($270,000) $114,940 $123,673 $112,335 $165,416

a) Assume this project is of average risk. Using these cash flows, find the net present value of the project.

b) Explain what your answer for the net present value in a) represents, and include in your discussion how the NPV is related to the CCC of 10%.

c) Suppose that due to new business with a new insurance company, Shrieves now believes that this project is riskier than average. Shrieves has a policy of adjusting their corporate cost of capital by 2 percentage points for risk when evaluating projects. Now what is the risk-adjusted cost of capital for this project?

d) Using this risk-adjusted cost of capital, what is the new net present value of this project? Should Shrieves still continue to invest in this project? a) Suppose Shrieves expects interest rates to significantly decrease next month and to stay lower for the next 5 years. Lower interest rates will cause the present values of the net cash flows in Year 1-4 to _____________, and the net present value of the investment to ______________. A) decrease; decrease B) increase; decrease C) decrease; increase D) increase; increase