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Doctors Hanson, Dominick, and Borchard are radiologists living in Fargo, North Dakota. They realize that many of the state's small, rural hospitals cannot afford to purchase their own magnetic resonance imaging devices (MRIs). Thus, the doctors are considering whether it would be feasible for them to form a corporation and invest in their own mobile MRI unit. The unit would be transported on a scheduled basis to more than 100 rural hospitals using an 18-wheel tractor-trailer. The cost of a tractor-trailer equipped with MRI equipment is approximately . The estimated life of the investment is eight years, after which time its salvage value is expected to be no more than . The doctors anticipate that the investment will generate incremental revenue of per year. Incremental expenses (which include depreciation, insurance, fuel, maintenance, their salaries, and income taxes) will average per year. Net incremental cash flows will be reinvested back into the corporation. The only difference between incremental cash flows and incremental income is attributable to depreciation expense. The doctors require a minimum return on their investment of 12 percent.
What nonfinancial factors should the doctors consider in making this decision?
Solution
VerifiedIn this exercise, we are asked to identify the nonfinancial consideration applicable to the given situation.
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