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You have been asked to evaluate the proposed acquisition of a new clinical laboratory test system. The systems price is $50,000, and it will cost another $10,000 for transportation and installation. The system is expected to be sold after 3 years, because the laboratory is being moved at that time. The best estimate of the systems salvage value after 3 years of use is $20,000. The system will have no impact on volume or reimbursement (and hence revenues) but it is expected to save $20,000 per year in operating costs. The not-for-profit businesses corporate cost of capital is10%, the standard risk adjustment is 4% points. a) What is the projects net investment outlay at year 0? b) What is the project operating cash flows in years 1, 2, and 3? c) What is terminal cash flow at end of year 3? d) If the project has average risk, is it expected to be profitable? e) What if the project is judged to have lower than average risk? Higher than average risk?
What is most important to investors: the number of a company’s shares they own, the price of the company’s stock, or the value of their shareholdings in the company? Why?
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