Question

You are considering the acquisition of a new piece of equipment with a useful life of five years. This new technology will make your clinical operation more efficient and allow for a reduction of 10 FTEs. The equipment purchase price is $4,500,000 plus 10% installation fee. The purchase price includes service for the first year, an item that has an annual cost of $10,000. There is a potential for additional volume of 150,000 units in the first year, growing by 30,000 each year thereafter. The price charged per unit is $15.00 with a 50% collection rate. The staff being eliminated are paid $12.50 per hour. The fringe benefits rate is 20%. The hurdle rate is 7.5%.

Question:   After reviewing Dr. Ward's Video and the calculations below, please answer the following questions: 1. What is meant by benefit/cost ratio, average payback period and ROI and why are the all important to understand when purchasing new equipment? Based on this information, would you pursue this opportunity? Explain your decision in 250-500 words in the text box below.

Answer 1

Average Annual Working Hours is assumed to be at the industry standard of 2080 hours per year.

Also fringe benefits rate = Cost of Benefits / Annual Wages = 20%

As the equipment purchase process has positive NPV it implies that going with decision would add value to the firm. Thus one should go ahead with the equipment purchase decision.

NOTE: Please raise a separate query for answer to the remaining unrelated question.