Determine the benefit/cost ratio, the net present value, and the average payback period for the proposed equipment acquisition. Then, decide whether or not the opportunity should be pursued.
New instrumentation that is capable of performing 250,000 tests per year has a purchase price of $2,500,000. In addition, installation will cost $500,000. The manufacturer includes maintenance for the first year in the purchase price of the instrument. Thereafter, it will cost $20,000 per year for a maintenance contract. The instrument will generate added test volume at a rate of 150,000 tests in the first year. This amount will increase annually by 30,000 tests/year. You can charge $4 per test with a collection rate of 75%. In addition, you will be able to reduce the workforce by 14 FTEs each of which is paid $25,000/year. The fringe benefits rate for workers is 25%. The hurdle rate for this opportunity is 4%.