Use the data presented below to determine the benefit/cost ratio, the net present value, and the average payback periods for the proposed equipment acquisition. Then, decide whether or not the opportunity should be pursued and explain your reason(s). A new technology is available that may improve the financial performance of your organization. The equipment costs $ 38,000,000 and can perform 290,000 tests a year. There is high demand for this new kind of testing in your community. Installation of the equipment will cost an additional $600,000. The technology will allow your organization to see an increase in volume of 125,000 tests in the first year, climbing by 40,000 tests each year. The price charged for each test is $30.00. The test is covered by insurance. Several programs pay for it at different rates. The Care-4 - Me insurance company pays 85% of the charge for half of the patient population. Commemorative Coverage Company pays 65% for 25% of the patients. The remaining patients are self-paying customers who pay face value ($30.00) for the test. In addition to increasing the number of tests that can be performed, the technology will allow for a reduction of 7 full time staff each of whom is paid $68,000 per year plus an additional 14% for fringe benefits. Maintenance for the first year is included with the price of the equipment. Thereafter, the cost will be $28,000 per year. Prepare a benefit/cost analysis for a five year period to determine if this technology is worth pursuing. Your organization uses a hurdle rate of 7.7% for discounting future cash flows.
Use the data presented below to determine the benefit/cost ratio, the net present value, and the average payback periods for the proposed equipment acquisition. Then, decide whether or not the opportunity should be pursued and explain your reason(s). A new technology is available that may improve the financial performance of your organization. The equipment costs $ 38,000,000 and can perform 290,000 tests a year. There is high demand for this new kind of testing in your community. Installation of the equipment will cost an additional $600,000. The technology will allow your organization to see an increase in volume of 125,000 tests in the first year, climbing by 40,000 tests each year. The price charged for each test is $30.00. The test is covered by insurance. Several programs pay for it at different rates. The Care-4 - Me insurance company pays 85% of the charge for half of the patient population. Commemorative Coverage Company pays 65% for 25% of the patients. The remaining patients are self-paying customers who pay face value ($30.00) for the test. In addition to increasing the number of tests that can be performed, the technology will allow for a reduction of 7 full time staff each of whom is paid $68,000 per year plus an additional 14% for fringe benefits. Maintenance for the first year is included with the price of the equipment. Thereafter, the cost will be $28,000 per year. Prepare a benefit/cost analysis for a five year period to determine if this technology is worth pursuing. Your organization uses a hurdle rate of 7.7% for discounting future cash flows.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Use the data presented below to determine the benefit/cost ratio, the net present value, and the average payback
periods for the proposed equipment acquisition. Then, decide whether or not the opportunity should be pursued and
explain your reason(s).
A new technology is available that may improve the financial performance of your organization. The equipment costs $
38,000,000 and can perform 290,000 tests a year. There is high demand for this new kind of testing in your community.
Installation of the equipment will cost an additional $600,000. The technology will allow your organization to see an
increase in volume of 125,000 tests in the first year, climbing by 40,000 tests each year. The price charged for each test is
$30.00.
The test is covered by insurance. Several programs pay for it at different rates. The Care-4 - Me insurance company pays
85% of the charge for half of the patient population. Commemorative Coverage Company pays 65% for 25% of the
patients. The remaining patients are self-paying customers who pay face value ($30.00) for the test.
In addition to increasing the number of tests that can be performed, the technology will allow for a reduction of 7 full
time staff each of whom is paid
$68,000 per year plus an additional 14% for fringe benefits. Maintenance for the first year is included with the price of
the equipment. Thereafter, the cost will be $28,000 per year.
Prepare a benefit/cost analysis for a five year period to determine if this technology is worth pursuing. Your organization
uses a hurdle rate of 7.7% for discounting future cash flows.
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