Should we b all relevant costs. WCHC uses a discou rate of 5%. How much will wCH
ID: 2429548 • Letter: S
Question
Should we b all relevant costs. WCHC uses a discou rate of 5%. How much will wCHC need in foundation grants this year to make the purchase break-even financially? (Hint: What is the net present value of the costs of buying and operating the van over its lifetime, less the payments that will be received from the county? Are the payments from the county sufficient? If not, how much must be raised in grants before the van is purchased?) nt 9. Community Health Center (CHC) is considering spending $50,000 on a blood analyzer. The annual cash profits frorm the machine will be $7,000 for each of the 7 years of its useful life. The board of directors wants to pursue this investment, because they think the $49,000 CHC will receive is close to the $50,000 cost. What is wrong with the board's logic? What is the IRR on the investment? 10. Why can the IRR method lead to suboptimal decision-making by organizations? ing Ir Idi the ViExplanation / Answer
Answer of Chapter-9:
In the given case the decision taken by Board Of directors is not correct. The board is simply comparing cash inflows with the cash outflows for analysing net cash benefit from Blood Analyzer Machine.The Board is not considering the effect of time value of money.The board should consider the relevant discount rate applicable in this case,which is 5%.Therefore the net cash inflows from the Blood Analyzer machine should be first discounted @ 5% for seven year and then the net result should be compared with cash out flow.
The discounted cash flow should be calculated appling the following formula:
Discounted cash Flow=Net Cash Inflow for the year/(1+Interest Rate)n
Where n=No of year
Therefore the discounted cash flow will calculated as follows be as follows:
For 1st year=7000/(1.05)= $ 6666.67
For 2nd Year=7000/(1.05)2
=7000/1.1025=$ 6349.21
For 3rd year=7000/(1.05)3 =7000/1.157= $ 6046.12 AND SO ON TILL 7TH YEAR
It can be presented in Tabular Form:
Therefore the net discounted cash inflow is $ 40504.10 only.so the decision of board of director is not correct.
YEAR(A) DISCOUNTING FACTOR @5%(B) CASH IN FLOW(C ) DISCOUNTED CASH INFLOW(D=B*C) 1 0.9524 $7000 $6666.80 2 0.9070 $7000 $ 6349 3 0.8638 $7000 $ 6046.60 4 0.8227 $7000 $ 5758.9 5 0.7835 $7000 $ 5484.50 6 0.7462 $7000 $ 5223.4 7 0.7107 $7000 $ 4974.90 TOTAL $40504.10