A local hospital has the following replacement decision problem:Old machine: The hospital purchased a digital image-processing machinethree years ago at a cost of $50,000. The machine had an expected life ofeight years at the time of purchase and an expected salvage value of $8,000at the end of the eight years. However, the old machine has been slow athandling the increased business volume, so management is consideringreplacing it. The old machine can be sold today for $12,000. New machine: A new machine can be purchased for $80,000, includinginstallation costs. Over its five-year life, the new machine will reduce cashoperating expenses by $30,000 per year. Sales are not expected to change.At the end of its useful life, the new machine is estimated to be worthless.The hospital's interest rate for project justification is known to be 12%. The hospital does not expect a better machine (other than the current challenger) to be available for the next five years. Assume that the economic service life for the new machine and the remaining useful life for the old machine are both five years.(a) Determine the cash flows associated with each option (keeping the defender versus purchasing the challenger).(b) Should the hospital replace the defender now?
A local hospital has the following replacement decision problem:
Old machine: The hospital purchased a digital image-processing machine
three years ago at a cost of $50,000. The machine had an expected life of
eight years at the time of purchase and an expected salvage value of $8,000
at the end of the eight years. However, the old machine has been slow at
handling the increased business volume, so management is considering
replacing it. The old machine can be sold today for $12,000.
New machine: A new machine can be purchased for $80,000, including
installation costs. Over its five-year life, the new machine will reduce cash
operating expenses by $30,000 per year. Sales are not expected to change.
At the end of its useful life, the new machine is estimated to be worthless.
The hospital's interest rate for project justification is known to be 12%. The hospital does not expect a better machine (other than the current challenger) to be available for the next five years. Assume that the economic service life for the new machine and the remaining useful life for the old machine are both five years.
(a) Determine the cash flows associated with each option (keeping the defender versus purchasing the challenger).
(b) Should the hospital replace the defender now?
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