Sturgis Medical Clinic (SMC) in Sturgis, SD is considering investing in new medical equipment that would increase its capacity to provide added services to treat patients. The machine will have a 5 year expected life. The projected annual cash flows related to this investment are as follows.

Investment in new medical equipment $ 500,000

Shipping cost for new equipment 10,000

Installation of new medical equipment 25,000

Additional Working Capital for Receivables 60,000 Will be a permanent increase and will not be recovered when the machine is retired.

Travel and training to operate equipment for staff 55,000

Power upgrade to handle new equipment 10,000

The projected incremental annual income statement related to the services to be provided by the new machine appear below:

Added billed revenue: $750,000

Expected uncollectible and insurance adjustments 50,000

Cash expenses 350,000

Sturgis corporate income tax rate is 40%.

Sturgis uses straight-line depreciation on its books over 5 years and assumes a $25,000 salvage value.

MACRS depreciation is used on their tax return and $0 salvage is assumed. The MACRS 5 year depreciation percentages using the . year rule are Year1 20% Year 2 32% Year 3 19.2% Year 4 11.52% Year 5 11.52%. Year 6 5.76%

SMC has an after-tax minimum required return on investments or WACC of 12%.

At the end of 5 years, SMC expects they could remove and sell the medical equipment to a smaller medical center for a net (after costs of removal) cash payment of $100,000.

Required (show your calculations):

a) Calculate the initial investment for this machine.

b) Calculate annual after-tax cash flow for each year that would result from acquiring the medical equipment.

c) Calculate the Payback Period for the investment in years and months.

d) Calculate the Net Present Value (NPV) of this investment.

e) Calculate the Profitability Index of this investment.

f) Calculate the Internal Rate of Return (IRR) for this investment.

g) Based upon your calculations should SMC make this investment?

h) Justify your answer in g above.