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# Payback period, net present value, annual rate of return

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Newman Medical Center is considering purchasing an ultrasound machine for \$1,150,000. The machine has a 10-year life and an estimated salvage value of \$30,000. Installation costs and freight charges will be \$19,200 and \$800, respectively. The center uses straight-line depreciation. Newman's cost of capital is 9%.

The medical center estimates that the machine will be used five times a week with the average charge to the patient for ultrasound of \$775. There are \$5 in medical supplies and \$20 of technician costs for each procedure performed using the machine. The present value of an annuity factor for 10 years at 9% is 6.41766, and the present value of a single sum factor for 10 years at 9% is .42241

Instructions
1. For the new ultrasound machine, compute the:

(a) cash payback period.
(b) net present value.
(c) annual rate of return.

#### Solution Preview

Newman Medical Center is considering purchasing an ultrasound machine for \$1,150,000.Â Â The machine has a 10-year life and an estimated salvage value of \$30,000.Â Â Installation costs and freight charges will be \$19,200 and \$800, respectively.Â Â The center uses straight-line depreciation.Â Â Newman's cost of capital is 9%.

The medical center estimates that the machine will be used five times a week with the average charge to the patient for ultrasound of \$775.Â Â There are \$5 in medical supplies and \$20 of technician costs for each procedure performed using the machine. The present value of an annuity factor for 10 years at 9% is 6.41766, and the present value of a single sum factor for 10 years at 9% is .42241

Instructions
1.Â Â For the new ultrasound machine, compute the:

(a) cash payback period.
(b) net present value.
(c) annual rate of ...

#### Solution Summary

Computes the cash payback period, net present value, annual rate of return.

\$2.49