Question

In: Finance

The General Hospital is evaluating new office equipment offered by 2 companies. In each case the...

The General Hospital is evaluating new office equipment offered by 2 companies. In each case the interest rate is 15% and the useful life of the equipment is 4 years. Use incremental analysis benefit cost ratio pW to determine the company from which you should purchase the equipment

Company A, Company B

First cost $ 15,000 $ 25,000

Annual M&R cost $ 1,600 $ 800

Annual benefit $ 8,000 $ 3,000

one-off cash flow $ 1,200. $ 900. (both saved in 2 years)

Salvage value. $ 3,000 $ 3,500

Solutions

Expert Solution

The Incremental benefit cost ratio analysis is used to select the best alternative project from a set of mutually exclusive alternatives. In case of The General Hospital is evaluating new office equipment offered by 2 companies.

Cash flow of Alternatives for the Office Equipment

Amount in $   

Particulars Company A Company B
Initial Investment 15000 25000
Annual operating and Maintenance Cost 1600 800
Worth of Annual Benefits 8000 3000
Useful Life 4 4
One off Cash Flow 1200 900
Salvage Value 3000 3500
Interest rate 15% 15%

Solution: Present worth of Cost of Company A

PW Cost of Company A = Initial Investment + Annual operating and Maintenance Cost (P/A, i, n)

= 15000 + 1600( P/A, 15% ,4)

= 15000+ 1600( P/A, 15%, 4) Present value annuity table at end

= 15000 + 1600(1.75) ( 1*(1+.15) 4) = 1.75

= 15000+ 2800

= 17800

PW Cost of Company B = Initial Investment + Annual operating and Maintenance Cost (P/A, i, n)

= 25000 + 800( P/A, 15% ,4)

= 25000+ 800( P/A, 15%, 4) Present value annuity table at end

= 25000 + 800(1.75) ( 1*(1+.15) 4) = 1.75

= 25000+ 1400

= 26400

Hence Company A is better than Company B.

jeff jeffy answered 1 month ago
Next > < Previous

Related Solutions

California Health Center, a for-profit hospital, is evaluating the purchase of new diagnostic equipment. The equipment,...
California Health Center, a for-profit hospital, is evaluating the purchase of new diagnostic equipment. The equipment, which costs $600,000, has an expected life of five years and an estimated pre-tax salvage value of $200,000 at that time. The equipment is expected to be used 15 times a day for 250 days a year for each year of the project's life. On average, each procedure is expected to generate $80 in collections, which is net of bad debt losses and contractual...
California Health Center, a for-profit hospital, is evaluating the purchase of new diagnostic equipment. The equipment,...
California Health Center, a for-profit hospital, is evaluating the purchase of new diagnostic equipment. The equipment, which costs $600,000 has an expected life of five years and an estimated pre-tax salvage value of $200,000 at that time. The equipment is expected to be used 15 times a day for 250 days a year for each year of the project's life. On average, each procedure is expected to generate $80 in collections, which is net of bad debt losses and contractual...
A firm is evaluating new widget machines offered by four companies. The selections are mutually exclusive...
A firm is evaluating new widget machines offered by four companies. The selections are mutually exclusive and only one will be bought. Use incremental rate of return analysis to decide which company’s widget machine should be purchased based on a MARR of 10%. Company A Company B Company C Company D Initial Costs $100,000 $150,000 $180,000 $190,000 Annual Benefit $31,000 $40,000 $33,000 $25,000 Salvage value $9000 $30,000 $27,000 $5,000 Lifetime 4 years 4 years 8 years 12 years IRR 11.9%...
California Health Center, a for �profit hospital, is evaluating the purchase of new diagnostic equipment. The...
California Health Center, a for �profit hospital, is evaluating the purchase of new diagnostic equipment. The equipment, which costs $600,000, has an expected life of 5 years and an estimated pretax salvage value of $200,000at that time. The equipment is expected to be used 15 times a day for 250 days a year for each year of the project�s life. On average, each procedure is expected to generate $80 in collections, which is net of bad debt losses and contractual...
Georgia Health Center, a for profit hospital, is evaluating the purchase of a new diagnostic equipment....
Georgia Health Center, a for profit hospital, is evaluating the purchase of a new diagnostic equipment. The equipment, which cost $600,000, has an expected life of five years and an estimated pretax salvage value of $200,000 at that time. The equipment is expected to be used 15 times a day for 250 days a year for each year of the project’s life. On average, each procedure is expected to generate $80 in collections, which is net of bad debt losses...
Georgia Health Center, a for profit hospital, is evaluating the purchase of a new diagnostic equipment....
Georgia Health Center, a for profit hospital, is evaluating the purchase of a new diagnostic equipment. The equipment, which cost $600,000, has an expected life of five years and an estimated pretax salvage value of $200,000 at that time. The equipment is expected to be used 15 times a day for 250 days a year for each year of the project’s life. On average, each procedure is expected to generate $80 in collections, which is net of bad debt losses...
Georgia Health Center, a for profit hospital, is evaluating the purchase of a new diagnostic equipment....
Georgia Health Center, a for profit hospital, is evaluating the purchase of a new diagnostic equipment. The equipment, which cost $600,000, has an expected life of five years and an estimated pretax salvage value of $200,000 at that time. The equipment is expected to be used 15 times a day for 250 days a year for each year of the project’s life. On average, each procedure is expected to generate $80 in collections, which is net of bad debt losses...
Case Study: A manufacturing company is evaluating two options for new equipment to introduce a new...
Case Study: A manufacturing company is evaluating two options for new equipment to introduce a new product to its suite of goods. The details for each option are provided below: Option 1 $65,000 for equipment with useful life of 7 years and no salvage value. Maintenance costs are expected to be $2,700 per year and increase by 3% in Year 6 and remain at that rate. Materials in Year 1 are estimated to be $15,000 but remain constant at $10,000...
14.7- California Health Center, a for �profit hospital, is evaluating the purchase of new diagnostic equipment....
14.7- California Health Center, a for �profit hospital, is evaluating the purchase of new diagnostic equipment. The equipment, which costs $600,000, has an expected life of 5 years and an estimated pretax salvage value of $200,000at that time. The equipment is expected to be used 15 times a day for 250 days a year for each year of the project�s life. On average, each procedure is expected to generate $80 in collections, which is net of bad debt losses and...
14.7 California Health Center, a for-profit hospital, is evaluating the purchase of new diagnostic equipment. The...
14.7 California Health Center, a for-profit hospital, is evaluating the purchase of new diagnostic equipment. The equipment, which costs $600,000, has an expected life of five years and an estimated pretax salvage value of $200,000 at that time. The equipment is expected to be used 15 times a day for 250 days a year for each year of the project’s life. On average, each procedure is expected to generate $80 in collections, which is net of bad debt losses and...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT