Case Study: Rationing Available Capital (100 points)
Consider the following scenario:
A Saudi Arabian hospital bought a new medical laser machine for 2,812,500 Saudi riyals (SAR). The machine will generate a cash flow of 562,500 SAR for six years, which is the expected useful life starting Year 1. The cost of capital is 8 percent. The expected salvage value for each year is shown below:
year Salvage value in Saudi riyals (SAR)
0 2,812,500
1 2,250,000
2 1,687,500
3 937,500
4 375,000
5 93,750
6 0
Using NPV, determine at what year the hospital should dispose of the equipment. Please make certain that you show your calculations. Submit your findings in a proposal to the hospital.
Your proposal should include the following components:
A one-page discussion identifying when the equipment should be disposed of based on NPV.
The calculations of NPV in an Excel spreadsheet which supports your position. You must show all your calculations for credit.