1. The MIT Whitehead Institute must choose between two cDNA microarray machines to expand their high-throughput genomic laboratory. Both of these machines have the same function, and the firm will only choose on vendor from which to purchase their machines.
The first machine, manufactured by Amersham Pharmacia (machine 1), will cost $350,000. The second machine, manufactured by PE Applied Biosystems (machine 2), will cost $300,000.
The cost of capital for both of these investments is 9.5%. The life for both machines is estimated to be 5 years. During this period, cash flows for machine 1 will be $17,000 per year and cash flows for machine 2 will be $8,000 per year. These cash flows include depreciation expenses. Calculate NPV for each machine and select the best choice for the MIT Whitehead Institute.
2. Two investment projects which are mutually exclusive both require a $10,000,000 investment. Projected cash flows are:
Year Project A Project B 1 $3,500,000 $6,500,000 2 3,500,000 3,000,000 3 3,500,000 3,000,000 4 3,500,000 1,000,000
If your discount rate is 12 percent, net present value and profitability index for each project. Which project has the best profitability index?
3. Your hospital is considering buying personal computers to install in each patient’s room. The cost of the investment to the hospital will be $1,400,000. It is expected that these PCs will reduce nursing costs by $200,000 per year for the next seven years. If your discount rate is 10 percent, what is the profitability index of this investment?
5. A Community Hospital has annual net patient revenues of $150 million. At the present time, payments received by the hospital are not deposited for six days on average. The hospital is exploring a lockbox arrangement that promises to cut the six days to one day. If these funds released by the lockbox arrangement can be invested at 8 percent, what will the annual savings be? Assume the bank fee will be $2,000 per month.
6. St. Luke’s Convalescent Center has $200,000 in surplus funds that it wishes to invest in marketable securities. If transaction costs to buy and sell the securities are $2,200 and the securities will be held for three months, what required annual yield must be earned before the investment makes economic sense?
7. You have projected depreciation expense to be $1,000,000 in the next fiscal year with year-end accumulated depreciation balances being $5,000,000. If inflation in medical equipment is averaging 10 percent per year and you wish to finance only 20 percent of your replacement needs with debt, what amount of replacement reserves should you target for year end?
8. Your hospital has billed charges of $4,000,000 in February. If your collection experience indicates that 20 percent is paid in the month billed, 40 percent in the second month, 20 percent in the third month, and 5 percent in the fourth month, determine the following values: a) Net patient revenue for February b) Collections of February charges in February c) Net accounts receivable at the end of March for February billings