You have been asked to evaluate the proposed acquisition of a new clinical laboratory test system. The system’s price is $50,000 and it will cost another $10,000 for transportation and installation. The system is expected to be sold after 3 years because the laboratory is being moved at that time. The best estimate of the system’s salvage value after 3 years of use is $20,000. The system will have no impact on volume or reimbursement (and hence revenues), but it is expected to save $20,000 per year in operating costs. The not for profit businesses’s corporate cost of capital is 10%, and the standard risk adjustment is percentage points.
- What is the project’s net investment outlay at year 0?
- What are the project’s operating cash flows in years 1,2, and 3
- What is the terminal cash flow at the end of year 3?
- If the project has average risk, is it expected to be profitable?
- What if the project is judged to have lower than average risk? Higher than average risk?
