Keating Hospital is considering two different low-field MRI systems: the Clearlook System and the Goodview System. The projected annual revenues, annual costs, capital outlays, and project life for each system (in after-tax cash flows) are as follows:
Clearlook
Goodview
Annual revenues $720,000 $900,000
Annual operating costs 445,000 655,000
System investment 900,000 800,000
Project life 5 years 5 years
Assume that the cost of capital for the company is 8%.
Required:
1. Calculate the NPV for the Clearlook System.
2. Calculate the NPV for the Goodview System. Which MRI system would be chosen?
3. What if Keating Hospital wants to know why IRR is not being used for the investment analysis? Calculate the IRR for each project and explain why it is not suitable for choosing among mutually exclusive investments.