Question

Humana Hospital Corporation installed a new MRI machine at a cost of $780,000 this year in its medical professional clinic in Cedar Park. This state-of-the-art system is expected to be used for 5 years and then sold for $100,000. Humana uses a return requirement of 24% per year for all of its medical diagnostic equipment. As a bioengineering student currently serving a Co-op semester on the management staff of Humana Corporation in Louisville, Kentucky, you are asked to determine the minimum revenue required each year to realize the expected recovery and return.

a. What is your answer?
b. If the AOC is expected to be $80,000 per year, what is the total revenue required to provide for recovery of capital, the 25% return, and the annual expenses?
c. Write the spreadsheet functions to display your answers.

Answer 1

A) $277824

B) $357824

C) 80000 - PMT(25%,5,780000,0) + PMT ( 25%,5,0, - 100000 )

Step-by-step explanation:

MRI machine cost = $780000

Salvage value of the MRI machine = $100000

Return requirement = 25% per year

A) Determine the the minimum revenue required each year to realize the expected recovery and return

Principal cost ( p )= $780000

salvage value ( S ) = $100000

i = 25%

n = 5 years

Minimum revenue per year

CR = - 780000 ( A / P , 25%,5 ) + 100000( A/P , 24%,5)

= - 780000 ( 0.3718 ) + 100000 ( 0.1218 )

= - 290004 + 12180 = -$277824

which means the minimum revenue required each year = $277824

B) If AOC = $80000

The total revenue required = $80000 + $277824

= $357824

C) spreadsheet functions to display answers

80000 - PMT(25%,5,780000,0) + PMT ( 25%,5,0, - 100000 )