PLEASE INCLUDE FORMULAS, AND HOW YOU COMPLETED PROBLEM Your career as the admini
ID: 2779894 • Letter: P
Question
PLEASE INCLUDE FORMULAS, AND HOW YOU COMPLETED PROBLEM
Your career as the administrator at Alpine Ambulatory Surgery Center continues with some decisions on replacing capital equipment. The anesthesiologist has let you know that the anesthesia machine in one of your three (3) operating rooms has failed. Repairs for the anesthesia machine can be made at a cost of $18,000 and will have a warranty to work for at least one more year. It is currently generating $8,000 a year in cash inflows and would expect to be at that level for at least the next four (4) years.
Replacing the unit would cost $55,000 and it would last for seven (7) years. You can get $4,000 in trade in for your current malfunctioning unit if you buy a replacement and could sell the replacement for $8,000 at the end of its seven year expected life. Your accountant estimates that the project will have the following annual cash inflows:
Year 1: $10,000
Year 2: $12,000
Year 3: $14,000
Year 4: $16,000
Year 5: $18,000
Year 6: $18,000
Year 7: $18,000
Your cost of capital is 7%.
Using this data, make a recommendation on repair/replacement of the anesthesia machine. You must show a calculation to support your recommendation. Recommendations without justifications (including some math) will not be accepted!
Explanation / Answer
solution-
If repair is done if machine is replaced cost of machine 55000 cost of investment in repairs 18000 cost of machine 55000 less scrap value 8000 proceeds from the sale of old machine 4000 amount to be charged to depreciation 47000 Year cash inflow less depreciation cash flow after depreciation Net proceeds 51000 amount of depreciation 6714.286 1 8000 4500 3500 2 8000 4500 3500 Year cash inflow less depreciation cash flow after depreciation 3 8000 4500 3500 1 10000 6714.286 3285.714 4 8000 4500 3500 2 12000 6714.286 5285.714 3 14000 6714.286 7285.714 Average or accounting rate of return (Average profit/initial investment)*100 19.44444 percent 4 16000 6714.286 9285.714 Average profit 14000/4 3500 5 18000 6714.286 11285.71 Initial investment 18000 6 18000 6714.286 11285.71 7 18000 6714.286 11285.71 Average or accounting rate of return (Average profit/initial investment)*100 12.08483 percent Average profit 14000/4 6163.265 Initial investment 51000 It is better to go for repair of the existing equipment because it result in higher accounting rate of return over the replacement.Related Questions
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