question archive Community Health Center is considering spending $50,000 on a blood analyzer
Community Health Center is considering spending $50,000 on a blood analyzer
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Community Health Center is considering spending $50,000 on a blood analyzer. The annual cash profits from the machine will be $7,000 for each of the 7 years of its useful life. The board of directors wants to pursue this investment, because they think the $49,000 CHC will receive is close to the $50,000 cost. What is wrong with the board's logic? What is the IRR on the investment?
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Answer:
| Year | Cash Flow |
| 0 | -50000 |
| 1 | 7000 |
| 2 | 7000 |
| 3 | 7000 |
| 4 | 7000 |
| 5 | 7000 |
| 6 | 7000 |
| 7 | 7000 |
| IRR | -0.50% |
The board is ignoring the net present value of the cash flows. The net present value might be negative for the health center.
