1. A hospital is planning to purchase a new MRI machine

that costs $2 million. The expected useful life of the

machine is 10 years and the annual maintenance cost is

$100,000. The hospital uses a discount rate of 8% for

capital budgeting decisions. What is the net present value

(NPV) of the investment?

a) $1,080,000

b) $1,200,000

c) $1,320,000

d) $1,440,000*

Rationale: The NPV is the difference between the present

value of the cash inflows and the cash outflows of the

investment. The cash inflows are the annual savings from

using the new machine, which are assumed to be $300,000

per year for 10 years. The cash outflows are the initial cost

of the machine and the annual maintenance cost. The

present value of the cash inflows is calculated by using the

annuity formula: PV = C * (1 - 1/(1 + r)^n) / r, where C is

the annual cash flow, r is the discount rate, and n is the

number of periods. The present value of the cash outflows

is calculated by adding the initial cost and the present value

of the maintenance cost, which is also an annuity.

Therefore, NPV = 300,000 * (1 - 1/(1 + 0.08)^10) / 0.08 -

2,000,000 - 100,000 * (1 - 1/(1 + 0.08)^10) / 0.08 =

$1,440,000.