Question: A Saudi Arabian hospital bought a new medical laser machine for 2,812,500 Saudi riyals (SAR). The machine will generate a cashflow of 562,500 SAR for six years, which is the expected useful life starting Year 1. The cost of capital is 8 percent. The expected salvage value for each year is shown below:
| Year | Salvage Value (in Saudi riyals – SAR) |
| 0 | 2,812,500 |
| 1 | 2,250,000 |
| 2 | 1,687,500 |
| 3 | 937,500 |
| 4 | 375,000 |
| 5 | 93,750 |
| 6 | 0 |
Using NPV, determine at what year the hospital should dispose of the equipment. Please make certain that you show your calculations. Submit your findings in a proposal to the hospital.
Answer: NPV is an effective evaluation tool when measuring innovative projects because it allows for objective evaluation of cash flows…….