Question

You recently requested bids for a new MRI (magnetic resonance imaging) machine in for your radiology department. As a result, two vendors have submitted quotes based off the specs in your proposal. You anticipate the service life of this machine to be 10 years and that it should generate $600,000 per year at 50% capacity. To remove any potential for bias, your compliance department has provided the bids to you (below) and removed the name of each company.

Bid: Company A

Supply and install a 3T (3 Tesla) MRI scanner. Once bid is accepted, work will be completed in 90 days. Each day after 90 days incurs a $5,000 (a day) penalty. Warranty is for 2 years. Software upgrades for 1 year.

Total cost: $3,650,000

Additional warranty: $150,000 (per year to year 5)

Software upgrades: $50,000 (per year up to year 5)

Bid: Company B

Supply and install a 3T (3 Tesla) MRI scanner. Once bid is accepted, work will be completed in 90 days. Each day after 90 days incurs a $5,000 (a day) penalty. Warranty is for 4 years. Software upgrades for 5 years.

Total cost: $4,400,000

Additional warranty: $75,000 (per year to year 10)

Software upgrades: $25,000 (per year up to year 10)

How would you calculate the ROI for each company? Is company B the better option? Thank you!

Answer 1

ROI = net income / total cost

net income = 600000$ * 10

= 6000000 $

total cost :

company A

a) equipment cost = 3650000 $

b) warranty cost = 450000 $

c) software upgrade cost = 200000 $

total cost = a+b+ c

= 4300000

note :

warranty cost - up to 2 years it is free. so no charge for the first 2 years.

total warranty provided for 5 years

balance chargeable warranty period = 3 years

cost per year is 150000$

for 3 years it is = 150000$ * 3

= 450000 $

software upgrade cost - total 5 years

free of cost for 1 year

chargeable is 4 years @ 50000 $ per year

the total charge for 4 years is = 50000$*4

= 200000 $

ROI for company A bid = [net income / total cost ] * 100

= [6000000/4300000] * 100

= 139.53%

total cost

company B

a) equipment cost = 4400000 $

b) warranty cost = 450000 $

c) software upgrade cost = 125000 $

total cost = a+b+ c

= 4975000 $

note :

warranty cost - up to 4 years it is free. so no charge for the first 4 years.

total warranty provided for 10 years

balance chargeable warranty period = 6 years

cost per year is 75000$

for 6 years it is = 75000*6

= 450000 $

software upgrade cost - total 10 years

free of cost for 5 years

chargeable is 5 years @ 25000 $ per year

the total charge for 4 years is = 25000$*5

= 125000 $

ROI for company B bid = [net income / total cost ] * 100

= [6000000/4975000] * 100

= 120.603 %

generally, ROI with a high percentage is used for decision making

ROI company A = 139.53%

ROI company B = 120.39 %

the bid of company B is not recommended for purchasing the machinery

Company A is highly recommendable