Topping Medical Center, a for-profit institution, wants to replace its film-based mammography equipment with new digital models. The cost of the new digital models is $3,500,000. The current models were purchased (3) years ago for $1,400,000.
The new digital models have a (5) year life and will be depreciated over a straight-line basis to a salvage value of $600,000.
The current models have (5) years remaining on their useful lives and will be depreciated over a straight-line basis to a salvage value of $400,000.
The current models could be sold in the marketplace for $1,200,000. The new models are expected to generate annual cash cost savings on film of $400,000 per year relative to the current models. Neither system will change patient revenues.
The imaging center has a 40% tax rate and a required rate of return of 5%.
The financial analysis will project over a (5) year period. Use the NPV approach to determine if the new digital model should be selected.