Problem 3 (Ignore income taxes in this problem.) Florida Hospital is considering
ID: 2546174 • Letter: P
Question
Problem 3
(Ignore income taxes in this problem.) Florida Hospital is considering the purchase of medical supply electronic delivery system that would cost $240,000 and would last for 8 years. At the end of 8 years, the system would have a salvage value of $50,000. The machine would reduce labor and other costs by $62,000 per year for 8 years. After 8 years, the hospital would need a larger system. Florida Hospital’s cost of capital is 12%.
Required:
Based on net present value analysis, should the system be purchased? Please, show your work!
Explanation / Answer
Amount Year(s) PV factor Present value Cost of electronic delivery system -240000 Now 1 -240000 Reduction in labor and other costs 62000 1-8 4.96764 307994 Salvage value 50000 8 0.40388 20194 Net present value 88188 Yes, the system should be purchased as net present value is positive
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