Question

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

Answer 1

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.