Question

A hospital is considering to purchase a diagnostic machine costing P800 000. The projected life of the machine is 8 years and has an expected salvage value of P60 000 at the end of 8 years. The annual operating cost of the machine is 75 000. It is expected to generate revenues of P 400 000 per year for eight years. Presently, the hospital is outsourcing the diagnostic work and earning commission income of P120 000 per annum; net of taxes. a. Advise the hospital management whether it would be profitable to purchase the machine, basing your recommendation under: i.Net Present Value Method ii. Profitability Index Method b. What are the relative merits and demerits of the following investment appraisal techniques and what conclusions would you therefore draw about their relative attractiveness? i.Payback period; and ii.Accounting Rate of Return.

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