Question

In: Accounting

The Hogwarts Hospital has an old MRI machine and an outdated computer system, and they are...

The Hogwarts Hospital has an old MRI machine and an outdated computer system, and they are considering purchasing their options:
Information to help in their decision is as follows:
MRI machine:
cost: $875,000
Number of MRI's performed each year 8200
expected labor savings due to more efficient machine: $40 per patient
life of new machine: 5 years
Computer system
cost: $600,000
expected cost savings per year with new system: $110,000
life of computer system 6 years
Hogwart's cost of borrowing (cost of capital) 8%
REQUIRED:
A) WHAT IS THE PAYBACK FOR THIS NEW MRI MACHINE?
B) WHAT IS THE NET PRESENT VALUE OF THIS NEW MRI MACHINE?
C) FROM A PURELY FINANCIAL PERSPECTIVE SHOULD HOGWARTS CONSIDER ACQUIRING THE NEW MRI MACHINE?
D) WHAT OTHER CONSIDERATIONS SHOULD HOGWARTS LOOK AT IN DECIDING WHETHER OR NOT TO ACQUIRE THE MRI MACHINE.
D) WHAT IS THE PAYBACK FOR THE COMPUTER SYSTEM?
E) WHAT IS THE NET PRESENT VALUE OF THE COMPUTER SYSTEM
F) FROM A PURELY FINANCIAL PERSPECTIVE, SHOULD HOGWARTS' CONSIDER ACQUIRING THE NEW COMPUTER SYSTEM?
G) HOGWARTS ONLY HAS THE RESOURCES TO ACQUIRE AT MOST 1 OF THESE ITEMS; WHICH (IF ANY ) DO YOU RECOMMEND?
JUSTIFY YOUR ANSWER IN A MEMO TO THE DR. GANDOFF, CEO OF HOGWARTS

Solutions

Expert Solution

A) WHAT IS THE PAYBACK FOR THIS NEW MRI MACHINE?

= Cost of the MRI / Annual savings = 875,000 / ( 8200 * 40) = 875000 / 328000 = 2.67 Years

B) WHAT IS THE NET PRESENT VALUE OF THIS NEW MRI MACHINE?

= NPV = Present value of savings - Investment

= 328000 * (PVIFA 8% , 5 Years ) - 875000 = 434,608.89

C) FROM A PURELY FINANCIAL PERSPECTIVE SHOULD HOGWARTS CONSIDER ACQUIRING THE NEW MRI MACHINE

Yes, Because, we have a positive NPV and also a low back period compared its life of 5 Years

D) WHAT OTHER CONSIDERATIONS SHOULD HOGWARTS LOOK AT IN DECIDING WHETHER OR NOT TO ACQUIRE THE MRI MACHINE

Ethical consideration calls for replacement of old MRI machines even though they don't have high profitability in them compared to any other investments of that size and nature.

Financial consideration may look for sensitivity of NPV for change in demand and corresponding savings.

D) WHAT IS THE PAYBACK FOR THE COMPUTER SYSTEM

= Cost / annual savings = 600,000 / 110,000 = 5.45 Years

E) WHAT IS THE NET PRESENT VALUE OF THE COMPUTER SYSTEM

= 110,000 * ( 4.62287966 ) - 600,000 = -91483.24

F) FROM A PURELY FINANCIAL PERSPECTIVE, SHOULD HOGWARTS' CONSIDER ACQUIRING THE NEW COMPUTER SYSTEM

NO, since a Negative NPV ...... Destroys the wealth by 91483.24

G) HOGWARTS ONLY HAS THE RESOURCES TO ACQUIRE AT MOST 1 OF THESE ITEMS; WHICH (IF ANY ) DO YOU RECOMMEND ?

As seen from above calculations, on comparative basis and pure financial perspective ......... MRI machine is the best choice.

ekkarill92 answered 1 year ago
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