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Capital Budgeting


Question 2 (6 marks) The Dandenong Hospital is considering purchasing two independent pieces of medical equipment having the following cash flow streams: Year Machine A Machine B 0 -$50,000 -$40,000 1 +20,000 +20,000 2 +20,000 +10,000 3 +10,000 +5,000 4 +5,000 +40,000 5 +5,000 +40,000 The Hospital uses a combination of the net present value approach and the payback approach to evaluate its equipment purchases. It requires that all equipment have a positive net present value when cash flows are discounted at 10 percent and that they have a payback period no longer than 3 years. Which machine or machines should the Hospital buy? Why?