HACM9102 Financial Management and Economics in Health Care Minor Assignment 2

Part 2: Capital Investment Decisions

Princess Charlotte Hospital (PCH) is considering the purchase of a new item of medical equipment. The decision has come down to a choice between Machine A and Machine B. Machine A has a cost of $135,000 and has an expected economic life of five years, after which it has a no scrap value. The cash flowed income for the next five years from this machine is:
Year Cash Flowed Income (annual)
Year 1 $48,000
Year 2 $43,000
Year 3 $40,000
Year 4 $35,000
Year 5 -$5,000
Machine B has an initial cash outlay of $117,500 with an economic life of five years and no scrap value. The cash flowed income from this machine is expected to be:
Year Cash Flowed Income (annual)
Year 1 $-4,000
Year 2 $30,000
Year 3 $47,500
Year 4 $50,000
Year 5 $65,000
PCH requires a return on average assets employed of 14% and has a cost of capital of 11%. It also prefers projects that pay for themselves within three years. Depreciation is always calculated on a straight-line basis.