Problem:
Hospitals board of directors has approved of purchasing of a new equipment with a capital investment of $400,000. The estimated life of the equipment is 10 years and during that period the estimated after-tax cash flows (EATCF) are given below. The investments required rate of return is 20%.
|
Year
|
0
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
|
|
EATCF
($1000)
|
-400
|
65
|
65
|
68
|
70
|
65
|
68
|
70
|
73
|
65
|
60
|
Evaluate this investment, in terms of:
a) Average rate of Return
b) Net Present Value
c) Profitability index
And whether or not it is acceptable and based on each method?
Note: Please show how you came up with the solution.