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.
Useful life when
Purchased.
Computer operating costs per year.
Computer operating and maintenance costs per year.
Depreciation expense per year.
Cost of capital.
$ 150,000
6 years
$ 45,000
$25,000
$10,833
10%
$100,000
5 years
$30,000
$12,000
$20,000
10%
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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