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Question(s) / Instruction(s):

Add or drop with net present value analysis: Franklin county hospital, a nonprofit hospital, bought and installed a new computer system last year for $ 150,000. The system is designed to relay information between labs and medical units. Charlene Walker, the hospital’s new computer specialist, had a meeting with Lou Campbell , vice president of finance. She began: Lou,  today I read in a journal that a new computer system has just been introduced. It costs$100,000, but I believe that by replacing our old system, we could reduce operating and maintenance costs that are now being incurred. The following are walker’s estimates:

 

Present system

New system

Purchase and installment price

$  150000

$  100000

Useful life when purchased.

6  Years

5  Years

Computer operating costs per year.

$  45000

$  30000

Computer operating and maintenance

$  25000

$  12000

Depreciation expense per year.

$  20000

$  20000

Cost of capital

10%

10%

 

Requirement:

a.            Based on an analysis, what advice do you recommend that walker give Campbell?

b.            At what price for the new computer system would Campbell be indifferent?

c.             Is this a typical make-or buy decision? Why?

 

 

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