| Problem 1 | ||||||||
| A | B | C | D | |||||
| Future | Future | |||||||
| Present | Value | Value | Future | |||||
| Value | Factor | Factor | Value | |||||
| a) | $19,000 | 1.08 | 1.2597 | $23,935 | ||||
| b) | $19,000 | 1.08 | 1.5869 | $30,151 | ||||
| c) | $19,000 | 1.08 | 1.9990 | $37,981 | ||||
| d) | $19,000 | 1.08 | 2.5182 | $47,845 | ||||
| Problem 2 | A | B | C | D | ||||
| Present | Present | |||||||
| Future | Value | Value | Present | |||||
| Value | Factor | Factor | Value | |||||
| a) | $1,40,000 | 0.970873786 | 0.862609 | $1,20,765 | ||||
| b) | $1,40,000 | 0.943396226 | 0.747258 | $1,04,616 | ||||
| c) | $1,40,000 | 0.917431193 | 0.649931 | $90,990 | ||||
| d) | $1,40,000 | 0.892857143 | 0.567427 | $79,440 | ||||
| Problem 3 | ||||||||
| a) | b) | |||||||
| IRR | IRR | |||||||
| Year | Cash Flow | Cummulative Cash Flow | Year | Cash Flow | Cummulative Cash Flow | |||
| Year 0 | $ (14,00,000) | $ (14,00,000) | Year 0 | $(14,00,000) | $ (14,00,000) | |||
| Year 1 | $ 4,70,000 | $ (9,30,000) | Year 1 | $ 3,92,000 | $ (10,08,000) | |||
| Year 2 | $ 4,70,000 | $ (4,60,000) | Year 2 | $ 3,92,000 | $ (6,16,000) | |||
| Year 3 | $ 4,70,000 | $ 10,000 | Year 3 | $ 3,92,000 | $ (2,24,000) | |||
| Year 4 | $ 4,70,000 | $ 4,80,000 | Year 4 | $ 3,92,000 | $ 1,68,000 | |||
| Year 5 | $ 6,70,000 | $ 11,50,000 | Year 5 | $ 5,32,000 | $ 7,00,000 | |||
| IRR= | 22.63% | IRR= | 14.53% | |||||
| NPV= | $ 5,67,306 | NPV= | $ 2,41,133 | |||||
| Problem 4 | ||||||||
| Year | Cash Flow | Cummulative Cash Flow | ||||||
| Year 0 | $ (55,00,000) | $ (55,00,000) | ||||||
| Year 1 | $ 28,00,000 | $ (27,00,000) | ||||||
| Year 2 | $ 28,00,000 | $ 1,00,000 | ||||||
| Year 3 | $ 28,00,000 | $ 29,00,000 | ||||||
| Year 4 | $ 28,00,000 | $ 57,00,000 | ||||||
| Year 5 | $ 36,00,000 | $ 93,00,000 | ||||||
| IRR= | 43.61% | |||||||
| NPV= | $ 45,06,531 | |||||||
| As the NPV is positive and IRR is higher than the cost of capital, the project should be accepted. | ||||||||
| Problem 5 | ||||||||
| What is the payback period for problem 3? | ||||||||
| a) | ||||||||
| Payback period = Year before recovery + Year before cummulative cash flow/cash flow for year paid off | ||||||||
| Payback period (show calculation) = | Year 2 + ($4,60,000/$4,70,000) | |||||||
| Payback period (show answer)= | 2.98 | yrs. | ||||||
| b) | ||||||||
| Payback period = Year before recovery + Year before cummulative cash flow/cash flow for year paid off | ||||||||
| Payback period (show calculation) = | Year 3 + ($2,24,000/$3,92,000) | |||||||
| Payback period (show answer)= | 3.57 | yrs. | ||||||
| Year | Lease Option | Borrowing Option | ||||||
| Initial Cost | $ 40,00,000 | $ 40,00,000 | ||||||
| Year 1 | $ (5,85,000) | $ (1,20,000) | ||||||
| Year 2 | $ (5,85,000) | $ (1,20,000) | ||||||
| Year 3 | $ (5,85,000) | $ (1,20,000) | ||||||
| Year 4 | $ (5,85,000) | $ (1,20,000) | ||||||
| Year 5 | $ (5,85,000) | $ (41,20,000) | ||||||
| Additional Payment/(Savings) | $ (10,75,000) | $ 6,00,000 | ||||||
| The annual cash flow for lease option is higher than the borrowing option, except the last year of payment. However, from the calculations above, it is clear that for lease options, the hospital would get higher tax benefit than the borrowing options and thus, it can decrease its cash outflows. Therefore Penn Medical should lease the equipment. | ||||||||
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