What is the net present value of each machine if the cost of capital is 10 per cent? 5 per cent? 15 per cent?

Question 5

Better Health
Pty. Ltd. is evaluating whether to buy pieces of medical equipment each of
which requires an up-front expenditure of $1.5 million. The projects are
expected to produce the following net cash inflows:

Year Equipment
A Equipment B

1 $500,000 $2,000,000

2 $1,000,000 $1,000,000

3
$2,000,000 $600,000

a.
What is the internal rate of return for each piece of equipment?

b.
What is the payback period for each machine?

c.
What is the net present value of each machine if the cost of capital
is 10 per cent? 5 per cent? 15 per cent?

d.
Should Better Health buy both machines, only one, or none? Explain
your answer.

Question 6

The
Adelaide Private Hospital has 3 patient services departments – Adult Medicine,
Obstetrics and Pediatrics. It also has 3 patient support departments –
administration, Facilities and Finance.

The
revenues of the three patient services departments are:

Adult
medicine $12 million

Obstetrics $6 million

Pediatrics $2 million

The
direct costs of all 6 departments are:

Adult
medicine $6 million

Obstetrics $3.6 million

Pediatrics $1.2 million

Administration $1 million

Facilities $4.4 million

Finance $1.8 million

Direct
costs of the support departments are allocated to patient services departments
using the direct method on the basis of the % of services provided by the
support departments to the patient service departments.

Table
1 below gives the percentages of support provided by the support departments to
both each other and the services departments. For example, 10% of admin’s
services are provided to the finance department and 20% to obstetrics.

Table
1

% of services provided by
Services provided to Admin Facilities Finance
Admin 0 5 5
Facilities 10 0 5
Finance 10 10 0
Adult Medicine 35 55 50
Obstetrics 20 10 25
Pediatriacs 25 20 15
Total 100 100 100

a.
Allocate
the support department overheads to the 3 patient service departments on the
basis of the % of services provided.

b.
Calculate
the profit and loss position for each of the patient service departments and
the hospital as a whole.

c.
Should
the hospital consider closing down any or all of the patient service
departments to increase its profitability or reduce its losses? Explain why or
why not.

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